The Reserve Bank of India (RBI) has reported a significant increase in its net short position in the forward book, which surged to $77.5 billion by the end of January 2025, up from $67.9 billion in December 2024. This growth reflects the bank’s interventions in the forex market due to the depreciation of the rupee and the uncertainties in global trade. The details were released in the RBI’s March 2025 monthly bulletin.
RBI’s Net Short Position in Forward Market: An Overview
The RBI plays a crucial role in the foreign exchange market, impacting the stability of the rupee, liquidity conditions, and the overall forex reserves. When we talk about a net short position, it means the central bank is set to sell more foreign currency than it has bought in the forward market.
• In January 2025, the net short position stood at $77.5 billion, an increase from $67.9 billion in December 2024.
• For January 2024, there was a net forward purchase of $9.974 billion.
• In terms of spot market intervention, there was a net sale of $11.1 billion in January 2025, following a net sale of $15.1 billion in December 2024.
Total Forex Transactions in January 2025:
- Purchases: $49.1 billion
- Sales: $60.2 billion
This reflects heightened forex activity due to global economic fluctuations and India’s trade balance adjustments.
Reasons Behind the Increasing Net Short Position
Several factors contributed to RBI’s decision to increase its net short position in the forward market:
1. Depreciation of the Rupee
• In January 2025, the rupee took a hit, dropping by 1.16%, which led the RBI to step in and help stabilize its value.
• Traders observed that the rupee’s decline ahead of the US political transition on January 20 had a noticeable effect on the forex market dynamics.
2. Foreign Equity Outflows
- There were large outflows from the Indian equity market in January 2025, particularly in the first half.
- This led the RBI to intervene in the forex market to manage currency volatility.
3. Impact of US Economic Policies
- As of March 17, 2025, the US dollar lost all gains made since mid-November 2024 due to uncertainties in US trade policies and economic growth.
- This resulted in fluctuations in the USD-INR exchange rate, impacting India’s forex reserves.
4. Real Effective Exchange Rate (REER) Moderation
- India’s REER (which indicates currency valuation against a basket of global currencies) declined:
- February 2025: 102.37 (down from 104.84 in January 2025)
- November 2024 Peak: 108.14, before moderating to 107.20 in December 2024.
- A fall in REER suggests that the rupee has become relatively undervalued, impacting trade competitiveness.
