RBI scrutinises methods banks use for unwinding rupee arbitrage trades

India's central bank is scrutinising the methods large banks used to unwind their rupee arbitrage positions, six sources said, on concerns the trades may have breached regulations ​and impeded efforts to stabilise the currency.

In late March and early April, the Reserve ​Bank of India effectively forced nL4N40F171 banks to unwind up to $40 billion in rupee arbitrage trades nL4N40K1C5 between the ‌onshore and non-deliverable forward markets as it sought to shore up a currency nL1N40K0ZX that was teetering at record lows due to the Iran war and foreign fund outflows.

Following the central bank's measures, the rupee has recovered from near 95.20 per US dollar to near 92.50, before paring its rally on Monday.

 

The central bank, in a rare such scrutiny of forex trades, is now looking into whether banks offloaded the arbitrage trades to corporates and related parties, three of the sources said. It has queried treasury officials across at least five large banks, reviewed details of their interactions with clients and sought details on transactions with related parties, they said.

Such unwinding of the trades hampered the objective of bringing dollars to the market to ease the downward pressure on the currency.

The Reserve Bank of India ‌did not immediately respond to an email seeking comment. The sources declined to be identified since they are not authorised to speak to the media.

Reuters could not determine the list of banks whose transactions are being scrutinised. It was not clear what penalties they could face if any violations were found.

Monitoring market behaviour

T Rabi Sankar, the central bank's deputy governor, spoke about banks shifting arbitrage trades to corporate clients, at an event organised by the Indian Foreign Exchange Dealers' Association in Paris over the weekend, according to two bankers who attended the event.

Banks facilitated arbitrage trades by corporate clients despite knowing that ​corporates are only supposed to hedge their foreign exchange exposure, two of the sources, who are both familiar with the central ‌bank's thinking on the matter, said.

Such transactions are not aligned with the spirit of the central bank measures and the regulator's scrutiny is meant to signal close monitoring of market behaviour, the first of the two sources ​said.

"If the central bank ‌finds that a bank has gone to a corporate entity and asked them to build an arbitrage position, that's market abuse," the ‌second source said, adding that corporates are supposed to hedge and not speculate on the currency.

The rupee, which fell 4% in March to a lifetime low, has been battered by more than $19 billion in foreign outflows from the country's ‌debt ​and equity markets ​over 2026 so far. The RBI has sold dollars from its forex reserves to support the currency.

Alongside the ongoing scrutiny, the central bank plans to move ahead with a proposal mandating nL1N40T06A that banks report offshore ‌rupee derivative trades, Reuters ​has reported.