India rupee recovery fades as corporates step in to exploit RBI-spurred dislocation

MUMBAI: The Indian rupee’s recovery on Monday faltered, as corporates entered arbitrage trades between the onshore spot market and non-deliverable forwards opened up by the central bank’s tightening of banks’ forex positions.

The Reserve Bank of India’s imposition of new limits on onshore positions of banks late on Friday forced lenders to offload dollars in the domestic market while simultaneously buying in the NDF market.

Given the large size of these positions — estimated at between $25 billion and $35 billion — this realignment has led to the onshore dollar/rupee rate quoting well below the NDF rate.

Firms stepped in to capture the spread by buying dollars onshore and selling in the non-deliverable forward market, checking the rupee’s rally and leading to uneven price action across segments.

Along with heavy importer demand from large corporates to hedge near-term liabilities, this led the rupee to surrender a large part of its opening rally.

The rupee, which jumped more than 1% to 93.60 at the open, came off to trade at 94.72 per dollar, up just 0.1% on the day.

The RBI’s move to curb banks’ arbitrage activity has led to the opening up of a new, more lucrative arbitrage window, a banker at a private sector bank said.

“If you a corporate, you absolutely want to take advantage of these once-in-a-decade opportunities. Yes, there’s mark-to-market risk, however that can be absorbed if you hold till maturity.”

The 1-month non-deliverable forward–onshore spread had blown out to over 1 rupee at one point, and has since come off to around 40-50 paise, still significantly wider than usual and attractive for corporates.

In the preceding months, the spread has typically been within a 1–5 paise range.

“Clients have been trading since 8:15 a.m. (IST),” an FX salesperson at a foreign bank said, adding that they had calls with clients over the weekend in preparation for this.