In April, the RBI would no longer have any short dollar positions on its books

20 Jun 2022 , 03:05 PM

To moderate volatility and protect the currency rate, the Reserve Bank of India (RBI) has been intervening in the foreign exchange market on a regular basis. In order to accomplish this, the RBI has become increasingly reliant on forward contracts, which allow it to postpone the impact of its foreign exchange operations on rupee liquidity.

Forward contracts are used by the central bank to sell and buy dollars. Forward contracts to sell dollars at a later date appear in the RBI’s records as short dollar positions, while forward contracts to buy dollars appear as long dollar positions. RBI’s short dollar bets were $0 in April, down from $18 billion six months earlier. This means that instead of rolling over past short dollar holdings, the central bank took delivery of them.

The central bank, on the other hand, has been using sell/buy swap auctions to roll over its long dollar positions. In a sell/buy swap, the central bank sells dollars on the spot market while also entering into a forward contract to purchase dollars at a later date. The RBI’s plan to run off its short dollars makes sense given that it is in a liquidity withdrawal posture. When the RBI sells dollars, it buys rupees.

At the same time, the central bank’s decision to use sell/buy swaps to extend its forward dollar purchase contracts shows that it wishes to defer the introduction of rupees to a later date. In March and April, it held two $5 billion swap auctions.