US-Iran deal: The preliminary agreement between the United States and Iran has given the Reserve Bank of India a window it badly needed. Oil prices have eased, the rupee has recovered from its lows, and dollar flows have returned to the local market. The RBI has moved to the other side of the trade. Instead of selling dollars to slow the rupee’s fall, it is buying dollars to rebuild reserves and reduce pressure from its forward book.
The rupee strengthened after expectations of a US-Iran peace agreement pushed oil lower, while later reports showed the currency closing at 94.33 to the dollar after a five-session gain.
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RBI dollar buying follows rupee recovery
Dealers said the central bank bought dollars as the rupee recovered. Business Standard reported dollar purchases of about $2-3 billion on Wednesday and $1-2 billion on Thursday. The rupee closed at 94.34 per dollar after touching 94.17 during the session, against 94.53 a day earlier.
That is normal central bank behaviour. When the rupee was under pressure, the RBI sold dollars in the spot market and leaned on forwards. When the rupee strengthens, it buys dollars. The purpose is not to fix a level for the exchange rate. It is to prevent a sharp one-way move and to restore firepower after a costly defence.
The timing matters. The rupee had come under pressure from the West Asia conflict, higher crude prices and foreign portfolio outflows. A stronger dollar added to the pressure. The decline in oil prices after the US-Iran framework has changed the trade for now. India imports close to 90% of its oil, so a fall in crude prices cuts dollar demand from refiners and improves the balance of payments arithmetic.
Forex reserves need repair
India’s foreign exchange reserves have fallen from the March peak. Reuters reported reserves at $681.6 billion after falling from $728.5 billion, while the latest RBI release put reserves at $671.63 billion for the week ended June 12. The newer number does not weaken the case for dollar buying. It strengthens it. The RBI has more reason to add dollars when market conditions allow.
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Reserves do more than finance imports. They allow the RBI to intervene when oil prices spike, capital leaves emerging markets, or external debt payments bunch up. In March, the central bank sold a net $9.8 billion in the spot market as the rupee fell to fresh lows. It bought $19.88 billion and sold $29.64 billion that month, according to RBI data reported by Reuters.
The central bank also acted through the forward market. That has left it with a second problem.
RBI short dollar forward book
The RBI’s short-dollar forward book has become too large to ignore. Reuters reported that the net outstanding forward dollar sales stood at $103.06 billion at the end of March, up from $77.7 billion a month earlier. A later report said the short-dollar forward book had reached nearly $110 billion, from about $96 billion in April.
A short-dollar forward position is a promise to deliver dollars later. It helps the RBI influence the exchange rate without selling spot reserves immediately. But the obligation does not vanish. As contracts mature, the central bank must deliver dollars, roll positions, or offset them.
That is why dollar buying during rupee strength is useful. It gives the RBI dollars in hand while reducing its reliance on forward intervention. It also signals to the market that the rupee rally will not be allowed to run too far too fast.
There is another reason for restraint. Exporters do not benefit from a sharp rupee rise after months of volatility. Textiles, engineering goods, chemicals and software services need a currency that does not swing violently with each move in oil or the dollar index. The RBI is unlikely to defend a particular number, but it will resist a disorderly move in either direction.
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Rupee outlook depends on oil and inflows
The rupee’s next move will be set by three variables: crude prices, foreign inflows and US rates. The US-Iran deal remains provisional. AP reported that negotiations are meant to finalise details of a framework agreement over a 60-day period, while Reuters reported continuing uncertainty around Iran, Hormuz and regional security.
Foreign inflows have helped. The rupee’s strongest weekly gain in 11 weeks came with softer oil and bond inflows. RBI measures to draw foreign-currency deposits and reduce hedging costs have also supported the currency.
But the dollar has not disappeared as a threat. US rate expectations can still pull money away from emerging markets. A fresh oil shock can revive demand for dollars from Indian importers. The RBI knows this. Its current dollar purchases are less a bet on rupee strength than a repair job after a period of stress.
The rupee may stay range-bound if oil remains soft and inflows continue. Sustained appreciation is unlikely while the RBI absorbs dollars. A renewed fall is also less likely if crude stays below recent highs and foreign flows hold. After the violence of the past few months, the central bank is using a calmer market to rebuild its defences.