Over the past two years, India’s central bank built one of the world’s largest bearish dollar bets to support a persistently weak rupee. It now faces the challenge of unwinding that position without destabilizing the currency market.
With a spate of recent measures expected to attract foreign capital, the Reserve Bank of India has started trimming its massive short dollar forward position, a stock of commitments to sell the greenback at a future date. The book had ballooned to a record $106.7 billion in May, as per Bloomberg calculations based on RBI data.
The balancing act lies in the pace and extent of the unwind. Leaving the contracts in place for too long can be costly and prolongs the RBI’s forward exposure, while scaling them back too quickly risks diluting the positive impact fresh overseas inflows would otherwise have on the rupee. A misstep could potentially stoke volatility, complicating the RBI’s currency defense just as a renewed flareup in US-Iran tensions drives oil prices higher.
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The conundrum has come up in internal meetings at the central bank, where officials have discussed how to reduce the position, according to people familiar with the developments, who asked not to identified discussing private matters. The rupee, which strengthened last month following the support measures, has resumed declines in July and remains on track for an unprecedented ninth straight year of losses.
