As we approach the end of the year, Indian bankers are raising concerns about the pressures on the Indian rupee in the forward market, urging the Reserve Bank of India (RBI) to take decisive action. The market is currently grappling with a significant glut of US dollars alongside intense activity in Non-Deliverable Forward (NDF) contracts, which is creating volatility and downward pressure on the rupee’s forward rates.

The surge in dollar liquidity has been primarily driven by several global and domestic factors including increased dollar supply and year-end balance sheet adjustments by financial institutions. While abundant dollar availability in the market would typically ease pressure on the rupee, the reality has been more complicated. The rupee forwards are under stress due to a combination of factors, including speculative NDF trades and the overarching demand for dollar assets.

Non-Deliverable Forwards (NDFs) are widely used by foreign investors and corporates to hedge currency risk in the Indian market since direct access to onshore foreign exchange markets is limited. However, these offshore contracts can sometimes amplify volatility as they can reflect investor sentiment that might be more bearish than actual onshore trading. The current heavy volume of NDF trades, coupled with dollar surplus, has created a mismatch leading to dislocations in rupee forward pricing.

Bankers have highlighted that this mismatch is unsettling for currency management and hedging strategies. The rupee forward curve is experiencing abnormal pressures, with the fall in the forward rates not always justified by onshore market fundamentals. This discrepancy is unsettling for businesses and financial institutions that rely on predictable currency rates for trade and investment planning.

In response to these developments, market participants are calling on the RBI to intervene more actively in the forward market to restore stability. The RBI has in the past stepped in to curb excessive volatility by selling dollars or adjusting monetary policy settings. However, with the current dynamics marked by a mix of strong dollar liquidity and intense NDF pressure, a coordinated approach is needed to handle these dual forces affecting the currency forwards.

Moreover, the RBI’s intervention will be crucial to balance the competing priorities of supporting the rupee and maintaining adequate liquidity in the system. The central bank has to carefully calibrate its actions to prevent negative spillovers into the broader financial markets or disruptions in foreign capital flows.

It is also important to note that the RBI has been actively managing the rupee’s volatility through various measures including open market operations and forward intervention. Yet, the persistence of dollar glut combined with speculative pressures in offshore markets underscores the evolving challenges faced by the central bank.

For investors and traders, this means navigating through a period of uncertainty where rupee forwards may continue to show volatility until clearer signs of stabilization emerge. Businesses engaged in import-export or foreign borrowing will need to be particularly vigilant about hedging strategies as forward contracts could see swings influenced by global dollar flows and offshore market sentiments.

In summary, the year-end dollar glut and NDF market pressures are roiling the Indian rupee forward market, prompting calls from bankers for the Reserve Bank of India to take prompt and effective action. As the financial community watches closely, the RBI’s response in the coming weeks will be key to setting the tone for currency stability heading into the next year.