The Indian rupee's forward premiums retreated sharply from their multi-year peaks on Wednesday, December 24, after the Reserve Bank of India (RBI) announced a major intervention to address a glut of dollar liquidity in the banking system. The spot rupee, meanwhile, traded in a narrow range.
RBI's Strategic Move to Manage Liquidity
After market hours on Tuesday, the central bank unveiled a plan to conduct a 3-year $10 billion USD/INR buy-sell swap in January. This move was a direct response to a recent, sharp surge in forward premiums, driven by excess dollar liquidity and year-end balance sheet constraints that had prompted bankers to call for intervention.
The announcement, coupled with signs that state-run banks had already received forward premiums on the RBI's behalf on Tuesday, immediately soothed the market. The USD/INR January month-end forward premium eased to 41 paisa, down significantly from a peak of 58 paisa hit just a day earlier. Similarly, the November month-end premium pulled back to 240 paisa from a high of 278 paisa.
"These steps will inject rupee liquidity while drawing out excess dollars, a balance aimed at easing tight market conditions and cooling the sharp rise in forward premiums," explained Amit Pabari, Managing Director at CR Forex.
Spot Rupee Holds Steady Amid Calm
In contrast to the action in the forwards market, the spot rupee market was relatively quiet. The Indian currency was down a marginal 0.1% at 89.70 against the U.S. dollar. Traders anticipate a subdued close to the year following volatile swings earlier in December, which had driven the rupee to a record low of 91.0750 before aggressive RBI intervention sparked a rebound.
On Wednesday, slightly elevated demand for dollars at the daily reference rate offset the impact of a broadly weaker greenback. The dollar index itself was hovering near a two-month low at 97.9.
Annual Performance and Outlook
The rupee has depreciated approximately 5% against the dollar so far in 2025, making it the worst-performing Asian currency this year. This weakness has been attributed to tepid investment flows and the ongoing drag from steep U.S. trade tariffs.
The RBI's proactive swap operation is seen as a crucial step to stabilize the currency derivatives market and manage systemic liquidity as the year draws to a close, setting the stage for a more balanced start to the new year.
