Bankers avoid rupee arbitrage amid regulatory risk
Recent RBI curbs created arbitrage gaps between rupee futures and forwards. Bankers are avoiding these trades to manage risk and avoid regulatory scrutiny.
Pricing distortions resulting from recent foreign exchange curbs in India have opened a notable arbitrage window between exchange-traded rupee futures and onshore forwards. However, financial institutions remain hesitant to capitalize on these spreads due to the perceived regulatory risks and previous losses associated with central bank interventions.
The Reserve Bank of India (RBI) has introduced several measures, including limits on the net open foreign exchange positions of banks, which have forced a reversal of significant arbitrage trades. This has led to heavy dollar selling in the onshore forward market, driving forward rates lower while futures prices have not adjusted at the same pace. For example, the April maturity dollar-rupee future was recently quoted near 93.4850, significantly higher than the onshore forward rate of approximately 93.25.
