A $73 billion short book is putting pressure on rupee

The rupee is on track to “underperform even as the dollar remains under pressure,” Barclays Bank Plc strategists including Mitul Kotecha wrote in a note

The Indian rupee is emerging Asia’s worst performer this quarter and may continue to lag peers as the central bank aims to avert a depletion in its foreign-exchange reserves, according to analysts.

Having already pledged to sell billions of dollars via derivatives contracts at various points in the future, the Reserve Bank of India is expected to buy up sizeable amounts of the US currency to prevent its holdings from running down. Those purchases are seen putting pressure on the rupee.

The central bank had dollar repayments of about $73 billion as of April as indicated by its net short forwards position, a measure of the amount of greenback it has agreed to sell at a future date, according to the central bank’s latest data. It has narrowed from an all-time high of $88.8 billion in February.

The potential dollar purchases may lead to the rupee falling to 86.50 per dollar by end-December, according to IDFC First Bank Ltd. The currency is likely to weaken to 87.50 per dollar, according to estimates by Commerzbank AG. It was trading 0.2% higher at 85.40 on Monday after a government report on Friday showed the nation’s economy grew stronger-than-expected 7.4% in the last quarter.

The rupee is on track to “underperform even as the dollar remains under pressure,” Barclays Bank Plc strategists including Mitul Kotecha wrote in a note. The RBI is expected “to be focused on replenishing its FX buffers while allowing its forwards book to run off.”

The RBI will likely avoid keeping a large book as it represents a large potential drain on reserves, said Gaura Sen Gupta, chief economist at IDFC First Bank.

The rupee is little changed this quarter, missing out on a rally against the dollar that has lifted other emerging Asian currencies amid outflows from India’s bond market. RBI Governor Sanjay Malhotra has been more flexible in allowing the currency to transition to a more market-determined trading regime.

Reserves are expected to cushion volatility in the exchange rate and build resilience to the increasing reoccurrence of geopolitical and economic shocks, the central bank in a report last week.

The RBI’s short dollar book up to three months stood at about $15 billion in April while the three-month to one-year bucket was at $37.8 billion, according to central bank data. Those payments, if not rolled over, may lead to depleting reserves.

India’s foreign-exchange reserves stood at about $693 billion as of May 23, lower than the all-time high of $705 billion reached in September last year.

Still, the authority has been less interventionist in recent months and may step in only at the extreme ends of the 84-87 range, said Vikas Jain, head of India fixed income, currencies and commodities trading at Bank of America.

Traders will look forward to RBI’s policy on June 6, where it’s expected to cut interest rates by a quarter point, according to Commerzbank AG.