Rupee Arbitrage Trades: RBI Deputy Governor Warns Banks
Why in the news
At a forex dealers’ meet in Paris, the RBI’s Deputy Governor sharply rebuked banks that profited from rupee price gaps between markets. The message stresses the RBI’s resolve to shield the rupee during West Asia tensions.
Key facts
- Speaker: T. Rabi Sankar, RBI Deputy Governor.
- Arbitrage: exploiting rupee price differences between the onshore market and the offshore NDF market.
- The trade: buy dollars in India, sell them offshore where they cost more; heavy local dollar buying drained liquidity while foreign investors were pulling out.
- Scale: banks had to reverse nearly $30 billion of trades after the curbs.
- Curbs: $100 million cap on each bank’s currency bets; no offshore derivative contracts.
- Displeasure at banks hiding trades in corporate clients’ books, though such firms are barred from speculation.
Why the RBI steps in
The RBI follows a managed float: the market sets the rupee’s value, but the central bank acts against excessive volatility.
- Imported inflation: a weak rupee makes oil costlier, lifting petrol and diesel prices.
- External debt: dollar borrowers face a heavier rupee burden if the currency falls.
- Investor confidence: wild swings can deter long-term FDI.
Exam angle
- Exchange rate regime: managed float.
- Related terms: NDF, arbitrage, position caps.