Indian Rupee Gains Erased by Corporate Arbitrage Trades
The rupee surrendered early gains as firms exploited price gaps between onshore and offshore markets. This followed new RBI limits on bank currency positions.
The recovery of the local currency in India faltered on Monday as corporate entities moved to exploit a significant market dislocation. This gap emerged between the onshore spot market and non-deliverable forwards (NDF) following recent regulatory changes by the central bank. The exchange rate for the US Dollar / Indian Rupee saw volatile price action as firms stepped in to capture arbitrage spreads created by new limits on banking positions.
The Reserve Bank of India (RBI) recently imposed restrictions on the onshore forex positions of banks, which forced lenders to offload dollars in the domestic market while simultaneously purchasing them in the NDF market. Market estimates suggest these positions range between $25 billion and $35 billion. This massive realignment caused the onshore dollar rate to trade significantly below the NDF rate, prompting large corporations to buy dollars onshore and sell them in the forward market.
