Photographer: Anindito Mukherjee/Bloomberg

RBI's Forex Book Holds Clues to Fate of Open-Market Bond Sales

  • Bank holds $31 billion of forward dollars due over next year
  • Not rolling over forwards will inject INR liquidity: StanChart

Is the Reserve Bank of India done with its open-market bond sales to suck out liquidity?

The biggest decline in benchmark yields in a year on Monday in reaction to the RBI canceling a debt sale would seem to suggest that, but traders should keep an eye on the central bank’s forward dollar book for clues.

The RBI held $31 billion of forward dollars maturing over the next year as of Sept. 30, with $3.9 billion due by the end of December, the most recent data show. Taking full delivery of the dollars would mean injecting an additional 2 trillion rupees ($30.8 billion) of liquidity into the system. History shows the authority typically rolls over a large part of the book, with prevailing global dollar liquidity helping to determine the exact proportion.

“If the RBI doesn’t roll over forwards, there will be injection of INR liquidity to that extent,” said Nagaraj Kulkarni, senior Asia rates strategist at Standard Chartered Plc in Singapore. “It’s critical to calibrate the forwards rollover to the liquidity in the banking system.”

The RBI’s burgeoning forward dollar book has largely been a fallout of its intervention strategy in the forwards market. In the process it chose to delay the injection of additional rupees. Now it has to choose when to inject them.

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