Chart of the Day: RBI’s big short in forex

The Reserve Bank of India (RBI) has been regularly intervening in the foreign exchange market. The intervention has increased in the forward contracts segment in recent times so as to manage the incidental addition or deletion of rupee liquidity that happens when dollars are bought or sold. The central bank’s outstanding forward position has been long on the dollar or in other words a huge pile of buy contracts at various future dates. In June this dropped by $18 billion month-on-month to $39 billion, as shown in the chart. That is because the RBI’s short dollar (dollar sale) position in the upto 1-month surged by $18 billion in June. During that month, the rupee had averaged around 77 to a dollar but short-term forward premium had crashed during that month. It is clear that the central bank’s intervention was behind that crash as indicated by currency dealers at that time. When the RBI sells dollars at a future date, it reduces the premium on it, making the rupee gain. At the same time, it also has to take a counter position in the spot market where it bought dollars. That said, the central bank ended up selling $3.7 on a net basis in the spot market. The upshot is that forex intervention needs a deft hand and the RBI has been able to pull it off so far. But intervention invariably creates distortion, in this case the crash in forward premium. On the whole, the relative success of keeping the rupee grounded compared with other Asian currencies shows that the RBI has been at the top of its game as far as exchange rate goes.