The Reserve Bank of India's restrictions on rupee positions are set to force an unwinding of arbitrage trades between the non-deliverable forward (NDF) and onshore markets, exposing banks to potential losses, six traders said. India's central bank on Friday, after market hours, said banks must ensure their net open rupee positions in the onshore deliverable market do not exceed $100 million at the end of each business day, with compliance required by April 10. Get the latest news from India and how it matters to the world with the Reuters India File newsletter. Sign up here. Advertisement · Scroll to continue
Net open position refers to the residual currency exposure a bank carries after offsetting all its positions. Under existing rules, banks can set net open position limits within 25% of total capital, while the RBI retains the power to impose tighter caps to manage currency volatility. The RBI's decision to impose limits on onshore positions comes against a backdrop of mounting stress on the rupee, spurred by an oil price surge and heavy foreign portfolio outflows following the start of the Iran war. The rupee has hit a string of all-time lows and is down about 4.2% this month, its worst decline in over seven years, sliding to 94.84 versus the U.S. dollar on Friday. Advertisement · Scroll to continue IMPACT ON NDF ARBITRAGE POSITIONS Bankers explained that until now they were allowed to run large arbitrage books without breaching limits because net open position caps were calculated after netting exposures across onshore, NDF and currency futures markets. For instance, a bank with a net open position limit of $30 million could take a much larger position in the onshore market, as long as it was offset by an opposite position in the NDF market, leaving little or no net exposure. The RBI's latest move changes that dynamic by placing a cap specifically on onshore positions. This means that even if positions are offset in the NDF market, any onshore exposure exceeding the prescribed limit will have to be pared back, effectively forcing banks to unwind arbitrage trades between the two markets. Estimates of these arbitrage positions range from about $10 billion to nearly $18 billion, according to bankers.
