RBI Starts Unwinding Short Dollar Book As OMO Purchases Surge

India’s central bank cut down on short positions in its dollar forward book as it likely let some of the contracts mature.

The net short dollar book stood at $64.2 billion in March, after hitting a record $88.8 billion the previous month, data from the Reserve Bank of India showed Wednesday.

RBI’s short dollar book rose for five successive months through February as the central bank actively intervened in both the onshore and offshore derivatives markets to support the rupee against a dollar surge following President Donald Trump’s reelection.

“The unwinding of short forward contracts by the RBI would reduce headline reserves and simultaneously create a drain on systemic liquidity,” QuantEco Research economists including Vivek Kumar wrote in a note. “OMO purchases could play a role in sterilizing the liquidity impact.”

There is scope for the RBI to unwind about $27 billion of its net short positions by February, according to estimates by QuantEco. This implies a cumulative liquidity drain of 2.3 trillion rupees – the potential target for sterilization via OMO purchases through fiscal 2026, the note said.

The monetary authority has resorted to large scale OMO purchases to ensure adequate liquidity in the banking system. The RBI said late Monday that it will buy 1.25 trillion rupees ($15 billion) of bonds in May, taking its total purchase to 2.45 trillion rupees since April 1. Governor Sanjay Malhotra has said the target is to keep liquidity in 1% surplus of net deposits.

The RBI’s net short position in maturities of up to one-month stood at $11.8 billion while that in tenors of more than one month to up to three months amounted to $12.2 billion, data showed. The net exposure for contracts of more than three months and a year totaled $40.3 billion.

“RBI may not want to make the forward book more negative by adding net dollar short positions,” Gaura Sen Gupta, chief economist at IDFC First Bank wrote in a note. “Instead, it may allow some of the short-end swaps to mature and extend the maturity of the rest.”