RBI Examines Methods Banks Used to Unwind Rupee Arbitrage Trades

The Reserve Bank of India is examining how banks unwound large rupee arbitrage positions after recent action in the currency market.  

As per Reuters, the review follows concerns that some transactions may not have met regulatory expectations during the period of intervention. 

Pressure on the Rupee 

The rupee declined about 4% in March and touched a record low near 95.20 against the US dollar. The fall came alongside tensions linked to the Iran conflict and foreign outflows of more than $19 billion from debt and equity markets so far in 2026. 

In response, the central bank sold dollars and asked banks to unwind arbitrage positions between the onshore market and offshore non-deliverable forwards. These positions were estimated at up to $40 billion. 

Currency Movement After Intervention 

After the measures, the rupee recovered to around 92.50 per dollar before easing again in recent sessions. The unwinding was expected to increase dollar supply in the market and reduce pressure on the currency. 

The central bank is now reviewing whether the way these trades were exited affected that objective. 

Details Sought from Banks 

Officials have sought information from treasury teams at several large banks. This includes records of transactions, client dealings, and exposures involving related parties. 

The review is focused on whether banks moved arbitrage positions to corporate clients or affiliated entities while reducing their own books. 

Corporate Role Under Scrutiny 

Under existing rules, corporates are expected to hedge foreign exchange exposure rather than take positions aimed at profit from currency movements. 

Reports also suggest that officials have raised concerns that some trades may not have followed this approach. Any such activity could be treated as inconsistent with regulatory intent. 

Ongoing Oversight 

Alongside the review, the central bank is moving ahead with plans to require reporting of offshore rupee derivative trades. The step is for improving visibility over cross-border positions. 

Read More: Foreign Investors Flee Indian Stocks Amid Rising Oil Prices and Growth Concerns! 

Conclusion 

The review highlights tighter monitoring of foreign exchange transactions as authorities assess market behaviour during a period of currency volatility. 

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