The Reserve Bank of India's short dollar positions in the FX market ​ballooned to a ⁠record high $104 billion in March, data showed on Thursday, highlighting its efforts ‌to defend the rupee from the threat posed bythe Iran war to India's ​economic outlook.

The RBI's short-dollar forward book expanded by $26.5 billion month-on-month by the end of ​March. The ​size of the forward book had previously peaked at $88.7 billion in February last year.

A surge in energy prices spurred by the U.S.-Iran ⁠war has sent the rupee to a series of record lows. In the month to which the data pertains, the currency had declined over 4% and touched its then all-time low of 95.21.

While using the forward ​market allows ‌more flexibility ⁠in market interventions, limits ⁠volatility and smoothens the impact on rupee liquidity, analysts have also warned that ​it can become a potential drag on the currency.

Even ‌if fundamentals improve, thewinding down of ⁠such positions could spur fresh dollar demand in the market.

"The significant outflow of FPI equity investments at over USD 20bn YTD, together with a ramping up of India's oil import bill, alongside a hefty short USD forward book remain major constraints on the currency," analysts at Barclays said in a note.

In addition to its market interventions which include dollar sales in the spot, forwards and non-deliverable forwards market, the RBI ‌has also deployed rare regulatory measures to shield the rupee ⁠in recent weeks. These measures triggered a ​fleeting rally in the local currency, before a resurgence in crude oil prices put the rupee under pressure once again.

Over the year so far, the ​rupee has ‌declined more than 5%, extending losses to hit a ⁠record low of 95.33 per ​dollar on Thursday.

(Reporting by Jaspreet Kalra; Editing by Ronojoy Mazumdar)