🔺 What to do when markets are at an all-time high? Find smart bargains, like these.See Undervalued Stocks

Exclusive-India cenbank lifting curbs on forex non-deliverable forward arbitrage by banks, sources say

Published 02/26/2024, 04:20 AM
Updated 02/26/2024, 12:26 PM
© Reuters. FILE PHOTO: A man walks behind the Reserve Bank of India (RBI) logo inside its headquarters in Mumbai, India, April 8, 2022. REUTERS/Francis Mascarenhas/File Photo
USD/INR
-

By Jaspreet Kalra and Nimesh Vora

MUMBAI (Reuters) - India's central bank is easing restrictions on banks' arbitrage trades between the outright foreign exchange over-the-counter (OTC) and the non-deliverable forward (NDF) markets, four people familiar with the matter said.

The Reserve Bank of India (RBI) has allowed banks, that have made requests, to resume such trades, a person directly familiar with the central bank’s thinking said. "There have been banks who have called and asked whether they can start doing it," and the central bank has approved, this person said.

At least two public-sector banks and a private-sector lender have been allowed to recommence arbitrage trades, according to three bankers.

Arbitrage trades allow investors to benefit from the price differences of securities in different markets but can exaggerate price trends.

The RBI had imposed an informal ban on dollar/rupee arbitrage trades in August 2023, when it was intervening to prevent the rupee from slipping to a record low, while banks were taking advantage of price differences between the OTC and NDF markets.

Banks' arbitrage positions "had ballooned" and were "running into double-digit billions of dollars", which the RBI "was not happy with", the person directly familiar with the central bank’s thinking said.

Now, the RBI wants to avoid a repeat and is asking banks to do arbitrage in a way that "shouldn't adversely impact the currency", he said.

"We had sought permission from RBI last week and they said you can go ahead," the chief manager at a mid-sized public sector bank said on Monday. The bank had not yet started building its FX arbitrage book.

All the persons declined to be named since they are not authorised to speak to the media.

The RBI did not immediately respond to an email seeking comment.

The lifting of the NDF arbitrage restrictions comes at a time when the Indian rupee is enjoying a period of tranquillity.

The currency's 30-day realized volatility has been below 2% since October and volatility expectations are lower than Asian peers. The low volatility has meant that the rupee's OTC and NDF rates diverge rarely and not by much, leading to fewer arbitrage opportunities.

© Reuters. FILE PHOTO: A man walks behind the Reserve Bank of India (RBI) logo inside its headquarters in Mumbai, India, April 8, 2022. REUTERS/Francis Mascarenhas/File Photo

The RBI has permitted arbitrage trades, "but in a limited way and slowly," a trader at the second public sector bank said.

"Currently, there is little to no arbitrage, so activity on our end has been slow."

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.