Major banks in India are rapidly exiting large-scale rupee arbitrage positions this week, ahead of a strict Reserve Bank of India (RBI) deadline aimed at curbing speculative trading, sources familiar with the matter told Reuters.
The unwind involves billions of dollars in carry trades, where banks borrowed cheaply in foreign currencies to invest in higher-yielding Indian government bonds and rupee deposits. These positions, which exploded in size amid low global interest rates and a stable rupee, now face mandatory reporting and potential restrictions under new RBI guidelines effective next week.
“Banks are offloading to avoid compliance headaches and potential penalties,” one Mumbai-based trader said, speaking anonymously. State-run lenders like State Bank of India and Punjab National Bank, along with foreign banks such as HSBC and Standard Chartered, have been leading the charge. Estimates suggest over $10 billion in positions could be squared off by Friday.
The RBI’s move stems from concerns over systemic risks, including rupee volatility if global rates shift suddenly. In a circular last month, the central bank mandated full disclosure of such trades and capped certain exposures to prevent “hot money” flows from destabilizing forex markets.
Market impact has been muted so far, with the rupee holding steady at around 83.50 per dollar on Thursday. Bond yields ticked up slightly, reflecting reduced demand. Analysts say the cleanup could ease pressure on India’s $650 billion forex reserves, bolstering the RBI’s defense against imported inflation.
This isn’t the first RBI crackdown on arbitrage plays; similar curbs in 2022 helped stabilize the currency during global turmoil. As banks comply, traders eye the next moves in a market bracing for U.S. Federal Reserve signals.
