RBI criticises banks' rupee arbitrage trades

A senior Reserve Bank of India official criticised foreign-exchange market makers for their role in aggravating the rupee's weakness during the ongoing West Asia tensions, as the regulator keeps up its tough messaging stance in its defense of the currency.

Addressing an annual foreign exchange dealers' conference in Paris at the weekend, deputy governor T Rabi Sankar said the arbitrage between local and offshore markets strained dollar liquidity at a time when the rupee was under pressure due to large foreign outflows, according to people familiar with the matter. They asked not to be identified as they are not authorised to speak to the media.

The central bank did not respond to an email seeking comment outside of regular business hours. Sankar did not reply to a text message seeking comment.

Sankar's comments came two weeks after RBI clamped down on speculation against the rupee by capping currency bets by banks at $100 million each and barring them from entering derivative contracts in the offshore market. The restrictions forced banks to reverse around $30 billion worth of arbitrage trades under which they had bought dollars in the local market and sold them offshore.

In his speech, Sankar signaled the regulator's displeasure at banks transferring arbitrage trades from their books to corporate clients even though companies are not allowed to undertake such transactions, the people said. The RBI also disapproved of certain other ways in which banks took the trades off their books to reduce their exposure, the people cited Sankar as saying at the conference in Paris. Last week, RBI governor Sanjay Malhotra said arbitrage positions had been building between offshore and local markets towards the end of March. While these linkages were important for efficient price discovery in normal times, excessive volatility could be destabilising, he said. Bloomberg


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