Mumbai: Reserve Bank of India’s net short position of USD 239 billion in the forward market is likely to limit the rupee’s appreciation despite a recovery in foreign portfolio investor (FPI) inflows, according to a report.
The Reserve Bank of India’s (RBI) forward book stood at a net dollar short position of USD 239 billion as of September 2026, reflecting its commitment to provide dollars when buy-sell swaps mature. This will require the central bank to accumulate dollars as capital inflows improve, limiting the rupee’s appreciation, IDFC First Bank Economic Research report said.
Around USD 40 billion of the short position matures within a year, USD 56 billion in one to three years and the remaining USD 143 billion in three to five years. The longer-duration positions are largely linked to the FCNR (B) scheme, it added.
“The large negative forward book implies that the RBI will need to accumulate dollars in order to meet the commitments when these buy-sell swaps mature. Hence, any improvement in capital inflows will be absorbed by the RBI, limiting the downward move in USD/INR,” the report said.
The large forward position also limits the RBI’s ability to sell dollars in the spot market, as its capacity to sterilise such sales through additional buy-sell swaps is constrained. The central bank’s focus over the next few years will be to gradually reduce its forward book.
The report said the rupee could see near-term appreciation if US-Iran tensions ease further and American AI stocks correct. A pickup in FPI inflows in November has also improved investor sentiment towards India.
However, competition from the US for global capital and elevated US Treasury yields are expected to limit sustained gains in the domestic currency.
IDFC First Bank expects the rupee to trade at 92-94 per US dollar by December 2026, weaken to 94-95 by March 2027 and touch 96 by June 2027.
Highlighting pressure on India’s external balances, the report said the balance of payments (BoP) is tracking a surplus of USD 65 billion in the first half of FY27. However, without RBI’s swap windows, the underlying BoP deficit would have been USD 85 billion.
The central bank’s FCNR (B), external commercial borrowings and overseas foreign currency borrowing swap windows have attracted cumulative inflows of USD 150 billion. These are borrowed dollars that will have to be repaid over three to five years.
The report also flagged a decline in India’s unencumbered foreign exchange reserves, which exclude the forward book. Import cover on this measure fell to around seven months in October 2026 from 10 months a year earlier.
Meanwhile, RBI’s measures to curb dollar demand, including a special window for oil marketing companies and the Foreign Exchange Risk Reserve (FERR) for importers, have reduced pressure on the spot market.
The gap between client forward dollar purchases and sales declined to USD 17 billion in October, a 12-month low, from USD 197 billion in the first seven months of FY27. However, the report cautioned that importer hedging could pick up again if expectations of the rupee depreciation persist.
The improved currency outlook has also reduced the need for an aggressive interest rate defence. IDFC First Bank expects the RBI to raise rates by 0.25 per cent each in December and February, with a possible final 0.25 per cent hike in April.
The report expects India’s crude oil basket to average around USD 85 per barrel in the remaining months of FY27, against USD 102 per barrel in the first seven months. A possible US-Iran agreement could trigger a sharper correction in crude prices, further supporting the rupee.
