RBI Cracks Down on Rupee Arbitrage

At a recent foreign exchange dealers' conference in Paris, Deputy Governor T. Rabi Sankar highlighted how arbitrage activities between local and offshore markets were straining dollar liquidity while the rupee faced pressure from foreign outflows. These comments came weeks after the RBI imposed new restrictions to curb speculation against the rupee.

The central bank limited banks' currency bets to $100 million each and barred offshore derivative contracts, prompting banks to reverse around $30 billion in arbitrage trades. Sankar also signaled the RBI's disapproval of banks transferring these trades to corporate clients, even though companies are not permitted to engage in such transactions.

Governor Sanjay Malhotra noted that excessive arbitrage positions had built up by late March. While such linkages are vital for price discovery, he cautioned that rapid build-ups could be destabilizing. The RBI has stated these currency market curbs are temporary.

Since the RBI's initial intervention to support the rupee, which had reached record lows, the local currency has appreciated by approximately 2%. It has emerged as Asia's top performer this year as banks unwound bearish rupee positions before an April 10 deadline.