Indian rupee set to climb amid arbitrage unwinding prompted by RBI position limits

MUMBAI: The Indian rupee is poised to rally at the open on Monday amid arbitrage unwinding prompted by the central bank’s curbs on onshore ​position limits.

The Reserve Bank of India late Friday directed banks ‌to cap their net open rupee positions in the foreign exchange market at $100 million by the end of each business day, with compliance required latest by April 10.

The RBI’s curbs on onshore ​position limits are expected to lead to dollar selling by banks in ​the domestic foreign exchange market amid unwinding of existing arbitrage positions.

These ⁠arbitrage trades were built by buying dollars onshore and selling them in ​the NDF market to exploit the spread between the two segments.

This spread had widened ​significantly amid a pickup in volatility and the fall in rupee on heightened risk aversion and oil-driven pressures linked to the Iran war.

The size of such positions is estimated at $25 billion ​to over $50 billion.

The pressure on the rupee has been intense amid persistent portfolio ​outflows and mounting concerns over the impact of higher oil prices on India’s economic outlook.

The rupee ‌has ⁠dropped more than 4% in March through Friday, putting it on course for its worst monthly performance in more than seven years.

The currency on Friday dropped nearly 1% to 94.8125, hitting an all-time low of 94.8400.

The RBI had been intervening in ​both the onshore ​and NDF markets ⁠to support the currency and slow the pace of the rupee’s decline.

“Expect opening quotes to be all over the place—very ​wide spreads, very choppy price action,” a currency trader at a ​small ⁠private sector bank said.

“Any initial dip (in dollar/rupee) should see importer bids come in pretty quickly, while banks keep cutting positions. Hard to call where this settles.”

The bid-offer spread on ⁠the ​interbank order system was extremely wide, quoted at ​92.00/93.00.

The trader added that banks are likely to incur significant losses since they unwind positions at much ​wider spreads than where they were initiated.