Reserves Rebuilt, Rupee Rangebound: Reading the RBI's Real Reaction Function

Two numbers from the past fortnight do not obviously belong together.

The first is that India's foreign exchange reserves reached $716.9 billion in the week ended 14 August, up nearly $10 billion on the week and roughly $50 billion across seven consecutive weeks of accretion. The second is that the rupee closed at 95.7450 to the dollar on Monday, 24 August, a little over one per cent away from the all-time low of just under 97 that it printed on 20 May.

A central bank that had added $50 billion to its buffer and won its currency battle ought to have a firmer currency to show for it. The Reserve Bank of India has the reserves. It does not have the rupee. So either the intervention is failing, or it is succeeding at something other than the exchange rate.

It is the second. And the evidence is not in the weekly reserves release that draws the headlines. It sits in a table almost nobody reads: the RBI's net outstanding forward position in the dollar-rupee market.

The ledger that actually matters

The forward book records the dollars the RBI has contracted to deliver, or to receive, at a future date. A net short position means it has promised to hand dollars over later. Think of it as intervention on credit: pressure absorbed today, settlement deferred to a date of the central bank's choosing.

Across 2026 that position has moved from unusual to structural. It stood at $67.8 billion at end-January and $77.7 billion at end-February, then vaulted to $103.1 billion by end-March. April brought a dip to $95.3 billion, May a fresh record of $106.6 billion, and June a reading of $103.3 billion, the most recent month for which the RBI has published figures.

Read only the June total and you would conclude the central bank had trimmed roughly $3 billion of exposure. The composition tells a better story. Forward dollar sales maturing within three months fell by nearly $13 billion, while liabilities stretching beyond one year rose by more than $6 billion.

The RBI did not shrink its obligation. It termed it out.

How the reserves were rebuilt

That is where the two puzzling numbers reconcile.

On 5 June the RBI announced, and on 8 June operationalised, a special dollar-rupee swap facility covering fresh FCNR(B) deposits, external commercial borrowings and overseas foreign currency borrowings. By 21 August the window had drawn $72.85 billion, with FCNR(B) deposits contributing $65.4 billion, OFCBs $4.86 billion and ECBs $2.59 billion, on the central bank's own count.

The plumbing is worth spelling out. A bank that raises an eligible FCNR(B) deposit sells those dollars to the RBI and takes rupees in exchange, under a contractual undertaking that the RBI hands the dollars back when the three-to-five-year deposit matures. The dollars enter reserves now. The promise to return them enters the forward book.

The rebuild is therefore real, but it is borrowed. Headline reserves and forward liabilities have been rising more or less in step, which is precisely why a $50 billion accretion has bought so little rupee appreciation. Those dollars were never free to be spent defending 95.

The reserve number tells you what the central bank holds. The forward book tells you what it owes. Only the difference tells you what it can actually spend.

Doing the subtraction

Net the last published forward position of $103.3 billion off $716.9 billion of headline reserves and roughly $614 billion remains.

Convert that into the metric the RBI itself prefers. Governor Sanjay Malhotra told the June policy press conference that reserves of $682.3 billion as of 29 May covered about eleven months of imports and 89.1 per cent of external debt. That implies a monthly import bill somewhere near $62 billion. On the same arithmetic, today's headline reserves cover close to twelve months of imports; net of the published forward book, closer to ten. That subtraction is ours, not the RBI's, which reports import cover on gross reserves.

Ten months is not a distress signal. It sits well above the six-to-eight-month band that ratings agencies and the IMF treat as comfortable, and India's external debt coverage remains strong. But it is a materially different picture from the one the headline conveys, and the gap between the two is the entire story.

One caveat carries real weight. The June forward book predates almost all of the swap execution, and banks may complete swaps with the RBI until 11 September. The July data, due on 31 August, offers the first genuine look at how much of that $72.85 billion has landed on the liability side of the ledger.

What the reaction function is optimising for

Set the pieces side by side and a consistent policy emerges.

In 2025-26 the RBI net sold a record $53.13 billion in the spot market, up from $34.51 billion the year before. Spot sales work, but they drain rupee liquidity from the banking system at the same time, which is awkward when the Monetary Policy Committee is holding the repo rate at 5.25 per cent and trying to keep transmission alive. Swaps and forwards carry no such cost. The shift from one instrument to the other was, in part, a domestic liquidity decision dressed as a currency decision.

Four preferences show through the data.

First, the RBI is managing the slope of the rupee's move rather than its level. Malhotra has said repeatedly that the central bank does not target a price or a band, and the pattern of ten-paisa daily ranges around 95.6 to 95.8 is consistent with exactly that. The currency has been allowed to find weaker levels; it has simply never been allowed to get there quickly.

Second, it places a high value on the headline reserve figure, which is a signalling asset in its own right for ratings agencies and foreign investors.

Third, it protects domestic rupee liquidity, favouring instruments that do not tighten conditions at home.

Fourth, it would rather carry a deferred, contingent obligation than spend a reserve it already holds.

Is this a sensible trade?

Largely, yes, and the context supports it.

India's current account deficit for 2025-26 was $25.2 billion, or 0.6 per cent of GDP, with the March quarter actually in surplus at $7.1 billion. The external imbalance was never the problem. The capital account was: net inflows collapsed to $1.8 billion in FY26 from $18 billion a year earlier, with foreign portfolio investors withdrawing $16.4 billion over the year. Layer on a West Asia conflict that has kept Brent near $94 a barrel, in an economy importing close to nine-tenths of its crude, and the shock looks external, energy-driven and plausibly temporary.

Meeting a temporary capital-account shock with three-to-five-year term funding is textbook central banking rather than improvisation. It is also a better-designed version of 2013, when the RBI's FCNR(B) swap window raised about $34 billion at a fixed 3.5 per cent. This time the sum is more than double, and it was raised from a position of strength, with $682 billion of reserves and a Governor describing them as adequate, rather than from the edge of a crisis.

The costs deserve stating plainly. The RBI is bearing the full hedging cost on the FCNR(B) swaps, a quasi-fiscal expense that surfaces in the central bank's own accounts rather than in the Budget. Roughly $65 billion of deposits raised on three-to-five-year tenors creates a redemption cluster somewhere between 2029 and 2031, and rolling it will be straightforward in a calm year and uncomfortable in a bad one. A large official short position sitting at the long end also keeps forward premia elevated, which raises hedging costs for importers and for foreign investors holding Indian bonds.

Four dates worth marking

31 August brings July's forward book data. If the total pushes well past May's record of $106.6 billion, with the increase concentrated beyond one year, the swap-financed rebuild is confirmed in the official numbers rather than inferred from them.

11 September is the last date on which banks may execute FCNR(B) swaps with the RBI.

31 December closes the ECB and OFCB windows. Note that the RBI advanced the FCNR(B) deadline from 30 September to 31 August just nine days after Malhotra told reporters no such proposal was under consideration, which tells you the flows overshot whatever internal target existed.

2029 to 2031 is the maturity wall.

The verdict

The RBI is not defending 95, and reading its behaviour as a failed line in the sand misses what the data actually says. It is smoothing the path of depreciation while quietly refinancing the cost of that smoothing, shifting it out of spent reserves and into future obligations at tenors long enough that the bill arrives in a different macroeconomic weather system altogether.

That is a defensible and reasonably sophisticated trade, executed from a position of genuine strength. It is not, however, a victory. And the headline reserve number is not the scoreboard. The forward book is.

Sources

All figures below were checked against these sources on 25 August 2026.

• RBI — press release on forex inflows mobilised under the special USD-INR swap facility (PDF) — https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR7967103E1BC46504DBB8FDB5878A844B858.PDF

• Reserve Bank of India — official website (Weekly Statistical Supplement, Monthly Bulletin, press releases) — https://www.rbi.org.in

• Business Standard — RBI forex swap facility attracts $72.85 billion inflows as of August 21 — https://www.business-standard.com/finance/news/rbi-forex-swap-facility-attracts-72-85-billion-inflows-as-of-august-21-126082200553_1.html

• Business Standard — RBI FCNR(B) swap window inflows swell to $65.39 bn, total hits $72.85 bn — https://www.business-standard.com/finance/news/rbi-fcnr-b-swap-window-inflows-swell-to-65-39-bn-total-hits-72-85-bn-126082200527_1.html

• Business Standard — RBI net-sells record $53.13 billion in spot forex market in FY26 — https://www.business-standard.com/markets/news/rbi-net-sells-record-53-13-billion-in-spot-forex-market-in-fy26-126052201719_1.html

• Business Standard — RBI steps up dollar buying to rebuild reserves, manage forward book — https://www.business-standard.com/finance/news/rbi-steps-up-dollar-buying-to-rebuild-reserves-manage-forward-book-126061801311_1.html

• Business Standard — Inflows over $52 bn, RBI opts to shut FCNR(B) tap ahead of schedule — https://www.business-standard.com/finance/news/rbi-to-close-discounted-foreign-exchange-deposit-swap-facility-prematurely-126081401606_1.html

• Business Standard — FCNR(B) swap window explained: why RBI opened it, then advanced the deadline — https://www.business-standard.com/finance/news/rbi-fcnr-b-window-nri-dollar-swap-deposit-scheme-deadline-forex-126081700609_1.html

• Business Standard — Forex reserves at healthy $682 bn, enough for 11 months of imports: RBI Governor — https://www.business-standard.com/finance/news/forex-reserve-at-healthy-682-bn-enough-for-11-months-of-imports-rbi-guv-126060500433_1.html

• Business Standard — India records $7.1 bn current account surplus in Q4 FY26: RBI data — https://www.business-standard.com/economy/news/india-records-usd-7-1-bn-current-account-surplus-in-q4-fy26-126060800885_1.html

• Business Standard — RBI MPC keeps repo rate unchanged at 5.25%, maintains 'neutral' stance — https://www.business-standard.com/finance/news/rbi-mpc-meet-august-repo-rate-governor-sanjay-malhotra-inflation-growth-gdp-126080500231_1.html

• Reuters / Business Recorder — Indian central bank's FX forward book shrinks slightly to $103.3 billion — https://www.brecorder.com/news/40432765/indian-central-banks-fx-forward-book-shrinks-slightly-to-1033-billion

• Reuters / Business Recorder — Interventions hold Indian rupee on narrow leash (24 August 2026) — https://www.brecorder.com/news/40436309/interventions-hold-indian-rupee-on-narrow-leash-traders-await-us-sanctions-on-iran

• Reuters / Business Recorder — Indian central bank likely intervenes, anchoring rupee (24 August 2026) — https://www.brecorder.com/news/40436315/indian-central-bank-likely-intervenes-anchoring-rupee-in-face-of-global-ructions-traders-say

• Bloomberg — Indian central bank intervenes as rupee drops to record low (20 May 2026) — https://www.bloomberg.com/news/articles/2026-05-20/inr-usd-indian-central-bank-intervenes-as-rupee-drops-to-record-low

• Bloomberg — India's forex reserves set to approach record high, analysts say (7 August 2026) — https://www.bloomberg.com/news/articles/2026-08-07/india-s-forex-reserves-to-rise-to-near-record-high-analysts-say

• Forbes India — India's current account surplus at 0.7 per cent of GDP in Q4 FY26 — https://www.forbesindia.com/article/news/indias-current-account-deficit-at-0-7-percent-of-gdp-in-q4fy26-rbi/2994758/1

• Business Today — RBI limits FCNR(B) forex swap facility after $52.3 bn inflows — https://www.businesstoday.in/latest/economy/story/rbi-forex-swap-facility-draws-72-85-billion-inflows-fcnrb-deposits-account-for-bulk-550756-2026-08-22

• Prasar Bharati / NewsOnAir — India's forex reserves reach record high of over $728 billion — https://www.newsonair.gov.in/indias-forex-reserves-reach-record-high-of-over-728-billion-usd