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The Reserve Bank of India is reviewing how major banks unwound large rupee arbitrage positions after directing trades worth up to USD 40 billion to be reversed to support the currency. The move followed pressure on the rupee due to global tensions and foreign fund outflows. The RBI is examining whether banks shifted positions to corporate clients during the process, potentially affecting its efforts to improve dollar liquidity. The review also focuses on compliance with rules restricting speculative forex activity. The development signals tighter oversight of currency markets as the central bank works to manage volatility and stabilise the rupee.
The Reserve Bank of India (RBI) is examining how major banks unwound large rupee arbitrage positions amid concerns that certain transactions may have breached regulations and affected efforts to stabilise the currency, according to sources. Advertisement
In late March and early April, the central bank directed banks to unwind arbitrage trades worth up to USD 40 billion between onshore and non-deliverable forward markets. The move was aimed at supporting the rupee, which had weakened to record lows due to global tensions and sustained foreign fund outflows.
Following the intervention, the rupee recovered from around 95.20 per US dollar to approximately 92.50 before easing again on Monday.
Sources indicated that the RBI is reviewing whether banks transferred these arbitrage positions to corporate clients or related entities during the unwinding process. The regulator has reportedly sought details from treasury teams at several large banks, including information on client interactions and related-party transactions.
Such actions, if confirmed, may have diluted the central bank's objective of bringing additional dollar liquidity into the market to support the currency.
The scrutiny marks a rare review of foreign exchange trading practices by the RBI. While it is unclear which banks are under examination, the regulator is assessing compliance with existing rules that require corporates to use foreign exchange instruments primarily for hedging rather than speculative purposes.
At a recent industry event, RBI Deputy Governor T. Rabi Sankar highlighted concerns around banks facilitating arbitrage trades for corporate clients. Market participants noted that corporates are expected to manage currency risk exposure and not engage in speculative trading.
The rupee has faced pressure in recent months, declining about 4 per cent in March amid more than USD 19 billion in foreign outflows from Indian equity and debt markets in 2026. The RBI has intervened in the currency market by selling dollars from its reserves to limit volatility.
Separately, the central bank is also moving forward with plans to require banks to report offshore rupee derivative transactions, signalling tighter oversight of foreign exchange market activity.
Source: Reuters
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