Why RBI has criticized INR arbitrage trades by banks
What's the story
The Reserve Bank of India (RBI) has criticized foreign-exchange market makers for their role in the rupee's depreciation during recent Middle East tensions. Deputy Governor T Rabi Sankar made the remarks at an annual foreign exchange dealers' conference in Paris over the weekend. He said that arbitrage between local and offshore markets strained dollar liquidity, when the rupee was already under pressure from large foreign outflows.
Regulatory actions
RBI restricts banks from entering offshore derivative contracts
Sankar's comments come after the RBI imposed restrictions on speculation against the rupee. The central bank has capped currency bets by banks at $100 million each and barred them from entering derivative contracts in the offshore market. These measures have forced banks to reverse almost $30 billion worth of arbitrage trades where they bought dollars locally and sold them offshore.
Trade transfer concerns
Banks shifting arbitrage trades to corporate clients
Sankar also expressed the RBI's displeasure at banks moving arbitrage trades from their books to corporate clients. This is despite companies not being allowed to undertake such transactions. The central bank was also unhappy with other methods used by banks to take these trades off their books, thereby reducing their exposure, Sankar said at the Paris conference.
Market stability
Arbitrage positions were building toward end of March
Last week, RBI Governor Sanjay Malhotra had said that arbitrage positions were building between offshore and local markets toward the end of March. He stressed these linkages are important for efficient price discovery in normal times but could be destabilizing during excessive volatility and rapid position build-up. Malhotra also said that the currency market curbs aimed at quelling speculation against the rupee are temporary measures.