ANALYSIS Why RBI’s forward market intervention matters more than spot?

Indian rupee

The recent volatility in the Indian rupee has been largely contained due to the Reserve Bank of India’s (RBI) aggressive intervention in the spot market, which helped the currency stage a sharp rebound and climb to its strongest level in nearly seven months. The rupee recovered 1.03 percent in the early morning trade, its highest since May 23, 2025, when it appreciated 1.05 percent.

The central bank’s action came at a time when the rupee had been hitting consecutive record lows and, earlier this week, and breached the 91-per-dollar mark for the first time. Such relentless depreciation triggered concerns over imported inflation, and broader market sentiment, prompting the RBI to lean heavily on its foreign exchange reserves to stabilize the currency.

This unexpected sharp depreciation of the domestic currency has also reignited a broader debate on the efficacy of the RBI’s tools, particularly the contrasting impact of interventions in the spot market versus the forward market.

Here's what you should know

When the central bank intervenes in the spot market, it directly sells dollars into the market to cushion the pressure on the rupee. This provides immediate support by boosting dollar supply and stabilizing the exchange rate. However, such intervention comes with two notable costs such as reduction in foreign exchange reserves, since the dollars supplied are drawn from the RBI’s own stockpile, and tightening of systemic liquidity, as rupee liquidity is absorbed from the banking system in exchange for the dollars sold.

In contrast, intervention in the forward market does not involve an upfront sale of dollars from the forex reserves. Instead, the central bank uses derivative contracts to influence expectations and pricing in the foreign exchange market.

Forward operations can shape hedging behaviour and guide exchange rate expectations over the medium term, while avoiding an immediate depletion of reserves or a sharp impact on banking system liquidity.

The central bank has increased its short dollar forward positions by $6 billion in September, marking the first rise in six months. This marks an important move by the central bank when the Indian rupee has been depreciating sharply and support was needed without reducing the forex reserves. Usually, forward position by the RBI helps the currency to cool off a bit.

The increase was marked after the central bank has cut down its positions in the forward book for the several months, except in February, when it has registered an increase.

The RBI's net short position in FX forwards and futures stood at $59.4 billion as of September-end signaling continued sales of dollars in the forward market. The data is released with a one-month lag.

The intervention in the spot rupee market by the RBI has helped the currency stage its strongest intraday recovery in seven months on December 17, thus snapping a prolonged bout of weakness against the US dollar.

At 09:40 AM, the local currency was trading at 90.0963 against the US dollar, as compared to 91.0762 at open and 91.0325 against the greenback at previous close.

In percentage terms, it recovered 1.03 percent, its highest since May 23, 2025, when it appreciated 1.05 percent.

The currency has been under pressure in the last few weeks especially due to delay in the trade deal, which led to the currency hitting fresh record lows. On the other hand, the limited intervention by the RBI was also adding to the pain.

In last three months, the rupee has been trading in the range of 88.20-91.03 against the US dollar.

Experts believe that the rupee in the next few weeks 89.70 to 90.60 against the US dollar.

“If rupee holds the ground for this week then there is change of price consolidation like October month. However, the trend is still weak for the rupee amid foreign fund outflows, delay in US-India trade deal and sustained dollar demand from the importers,” said Dilip Parmar, a foreign exchange analyst at HDFC Securities.