In order to tap the increasing pressure of appreciation of rupee viz a viz dollar due to continues inflow of foreign funds, The Reserve Bank of India (RBI)actively intervening in the spot market has built up a $31 billion position in rupee dollar forward contracts.
Economist and currency dealers have been arguing that RBI action could also be a form of insurance against an outflow of dollars as central banks around the world had begun normalizing the easy monetary policy led by US Federal Bank.
Foreign investors brought around $31 billion into India in 2017 which is equivalent to RBI’s net forward position in the market. However, the central bank is not willing to outrightly purchase dollars to increase the liquidity in the market as that can push up inflation. Therefore, while buying dollars in the spot market, RBI has been selling dollars in several tranches and buys them back in the forward market.
It is to be noted that forward contracts are designed to buy foreign currencies at pre-agreed prices, Bureaucracy Today reports.