The Wire Staff 
New Delhi: Amid mounting pressure on the rupee in recent weeks, the Reserve Bank of India (RBI) has intensified its interventions in the non-deliverable forwards (NDF) market. This move allows the central bank to manage currency volatility without directly impacting India’s foreign exchange reserves, although the profit or loss from these transactions is reflected in the RBI’s balance sheet upon contract maturity.
Forex dealers report that the RBI’s average daily short position in the NDF market stands at approximately $2 billion. Data from the Clearing Corporation of India reveals that between September and October, the central bank’s total short foreign currency positions in forwards and futures soared threefold to $49.2 billion, according to a Financial Express report.
NDFs are primarily used when one of the currencies involved is not freely traded on the forex market, categorising it as “non-deliverable.” These instruments are commonly utilised by businesses to hedge against currency risk when conducting transactions in countries with restricted or non-convertible currencies.
Market estimates suggest that RBI’s short positions in the NDF market could escalate further, reaching $65-70 billion in November, with some projections even as high as $90-100 billion. Additionally, the RBI has engaged in dollar buy/sell swaps, reportedly conducting swaps worth around Rs 300 crore on Wednesday and approximately $3 billion in swaps over the past week.
The rupee has depreciated by 1.25%, or Rs 1.05, since September 19, following the US Federal Reserve’s decision to cut interest rates for the first time. The RBI’s intervention in the NDF market amid pressure on the rupee aims to curb excessive volatility in the its opening levels, which are influenced by NDF settlement rates determined by the Financial Benchmark of India Limited (FBIL).
“NDF levels determine the opening level of the rupee in the spot market. So, intervening in NDF gives RBI a way to control the rupee’s opening level, thereby curbing volatility for the whole day,” a forex trader at a state-owned bank told the Financial Express.
Also read: Rupee Hits Record Low of 84.74 Against Dollar
In addition to NDF interventions, the RBI has resorted to dollar buy/sell swaps to defer dollar demand over an extended period. The central bank’s recent dollar sales have reportedly created a cash shortage in the domestic financial system.
Further actions are anticipated by the RBI, particularly as dollar demand is expected to rise in the coming months. The impending inauguration of Donald Trump as US President in January has added to global market uncertainties, which could prompt the central bank to introduce long-term dollar swaps of up to two years.
“RBI will use these tools, the NDF market and forex swap, intermittently to manage the volatility in the currency market. Also, NDF works 24/7, so it makes it easier for them to take positions, keeping movement in foreign markets in mind,” a trader with a private bank told the Financial Express.