Banks have exited the bulk of their Indian rupee arbitrage trades to comply with central bank-imposed limits on onshore positions aimed ​at reining in volatility and downward pressure on the currency, three ​people familiar with the matter said.
The Reserve Bank of India imposed limits on banks on ‌March 27, directing them to cap their net open positions in the rupee in the onshore market at $100 million, requiring that they comply by April 10.
The measures were aimed specifically at curbing arbitrage trades between the onshore market and the non-deliverable forward (NDF) market, per bankers.
Arbitrage trades by banks were contributing to heightened FX market volatility, RBI chief Sanjay Malhotra said on Wednesday, noting that the central bank had seen increased price swings in recent weeks.
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Estimates of the arbitrage positions varied widely when the measures were introduced, though market participants have since settled on a figure of roughly $40 billion, two of the people familiar with the matter ‌said, requesting anonymity because they were not authorised to discuss the matter publicly.
Most of these positions have been unwound, with no extension likely for banks, a person familiar with the central bank’s thinking said, asking not to be identified since they are not authorised to speak to the media.
The RBI did not immediately reply to an email seeking comment.Â
Price action signals unwinding doneÂ
Thursday’s price action, suggested that most arbitrage positions had already been unwound, with the rupee weakening and ​forward premiums rising – the opposite of what would be expected during heavy unwinding.
The rupee slipped 0.2% to 92.77 ‌per dollar, set to halt a four-day rise, while one-year forward premiums climbed 12 basis points to 3.12% after dropping more than 50 basis points over the past three ​sessions.
A currency trader ‌at a private sector bank said most positions at his bank had already been exited, and that ‌public sector banks, which had begun unwinding later, have done their exits over the past two days.
A senior treasury official at a foreign bank, said data from clearing house CCIL showed ‌that ​banks had exited ​their positions.
The data showed banks carried out close to $36 billion worth of NDF trades from April 1 to April 7, with Wednesday’s data still pending.
While some of the ‌activity was client-related, most ​represented position unwinding by banks, the treasury official said.Â