The Indian rupee is fast emerging as Asia’s worst-performing currency this quarter, and economists predict the trend may persist for the rest of the year. This underperformance is largely tied to the Reserve Bank of India’s (RBI) cautious strategy of shielding its foreign-exchange reserves, even at the cost of allowing the rupee to weaken further.

RBI’s Dollar Forward Commitments Raise Reserve Concerns

At the heart of the matter lies the RBI’s net short forward dollar position, which stood at approximately $73 billion as of April, according to central bank data. This figure represents the amount of US dollars the RBI has committed to selling in the future. Though it has narrowed from an all-time high of $88.8 billion in February, the outstanding commitments are still considerable.

These short positions indicate that the RBI will need to meet dollar repayments, which puts pressure on reserves if not rolled over. The likely result? Increased dollar buying by the RBI to meet these obligations — a move that may naturally push the rupee lower in the process.

Rupee Forecast: How Low Can It Go?

According to IDFC First Bank, the rupee may depreciate to ₹86.50 per US dollar by December. Commerzbank AG sees it going further, predicting a fall to ₹87.50.

On June 3rd, the rupee was trading at ₹85.42 per dollar, signaling that a further drop of 1-2 rupees is anticipated by year-end if current trends continue. These predictions stand despite expectations that the US dollar itself might remain under pressure globally.

Limited RBI Intervention in FX Markets

One of the key shifts observed is that the RBI is being less interventionist compared to previous quarters. Vikas Jain, head of India fixed income and currency trading at Bank of America, stated that the central bank is likely to intervene only at extreme ends of the ₹84 to ₹87 per dollar range, allowing the rupee to find its own level within this corridor.

This marks a move toward a more market-driven currency regime, a stance echoed by RBI Governor Sanjay Malhotra, who has been gradually allowing the rupee more flexibility in trading.

India’s Reserves Still Strong but Not Unlimited

As of May 23, India’s foreign-exchange reserves stood at $693 billion, a slight dip from the record high of $705 billion seen in September 2023. While this reserve level remains comfortably high, the looming short-term dollar repayments and global macroeconomic uncertainties make a case for prudence rather than profligacy.

The RBI’s short dollar book up to three months stood at $15 billion in April, and the three-month to one-year bucket was at $37.8 billion. These amounts, if not rolled over, can cause a notable dent in forex reserves, forcing the central bank to act preemptively.

Rupee Misses Out on Emerging Asia Currency Rally

Interestingly, while many emerging Asian currencies have strengthened against the dollar in recent weeks, the rupee has remained largely unchanged this quarter. One significant reason behind this is capital outflows from India’s bond market, which contrasts with inflows seen in other economies in the region.

This capital exodus has further weighed on the rupee and limited its ability to benefit from dollar weakness that other currencies have capitalized on.

Policy Outlook: June 6 RBI Meeting in Focus

Markets now turn their attention to the RBI’s upcoming policy meeting on June 6, where analysts expect a rate cut of 25 basis points, as forecasted by Commerzbank AG. This move, if materialized, could add downward pressure on the rupee by making Indian assets slightly less attractive to global investors.

However, the decision is not just about rates. Traders will be keenly watching for the central bank’s commentary on exchange rate management, reserve utilization, and forward book strategy.

Strategic Reserve Management Takes Center Stage

The central bank has previously stated that reserves are meant to “cushion volatility in the exchange rate and build resilience” to both economic and geopolitical shocks. This implies that the RBI will balance short-term rupee depreciation with the long-term objective of macroeconomic stability.

Barclays Bank strategists, including Mitul Kotecha, have noted that the RBI is expected to let its forward book run off while accumulating spot reserves quietly, thereby preparing for potential future volatility without excessive interference.

Summary and Future Outlook

In summary, the Indian rupee’s relative weakness is less about poor fundamentals and more about strategic reserve management. The RBI appears to be preparing for global uncertainties by building a buffer of hard currency, even if it comes at the cost of short-term rupee depreciation.

With interest rate cuts likely, a cautious RBI, and significant dollar repayments ahead, analysts believe that the rupee’s path to ₹87 is not just possible, but probable — unless global sentiment or domestic capital flows significantly change direction.

Key Takeaways for Readers:

• Investors and importers should brace for further INR depreciation and may consider hedging strategies.

• Exporters might benefit from the weaker rupee in the near term.

• Traders and analysts will keep a close eye on the June 6 RBI policy, which could set the tone for H2 2025.

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