The RBI's foreign exchange intervention is primarily based on forwards, let's learn more about it

17 Jun 2022 , 10:38 AM

The Reserve Bank of India (RBI) was a net buyer in the foreign exchange market in April, according to the central bank’s bulletin, but it reduced its long-dollar position in the forward segment.

After a difficult month in March, April may have been the last leg of relative calm, with dollar outflows limited to around $3 billion. The RBI’s buyer status appears to be transient and tactical in this context.

The central bank has been selling dollars continually since May, according to FX dealers, to slow the rupee’s decline. After falling by less than 1% in April, the currency has fallen by 2% since then.

More crucially, the RBI’s foreign exchange intervention is substantially weighted in favour of forward contracts. Note that the central bank engaged in a sell/buy swap with banks in March and April, in which it sold dollars while simultaneously agreeing to purchase them back at a later date through a forward contract.

This was done to extend the life of forward contracts that were about to expire. With such a big forward book, the central bank may need to keep selling and buying swaps to level out the impact of its forward contracts on the exchange rate.

Because the RBI reports its interventions with a two-month lag, statistics in the following months will reveal the scope of the RBI’s swaps or outright dollar sales.