RBI Curbs on Rupee Positions May Force Banks to Unwind Trades

India’s central bank, Reserve Bank of India, has introduced stricter limits on banks’ rupee positions, a move that traders say could force the unwinding of large arbitrage trades. Under the new rule, banks must ensure their net open rupee positions in the onshore market do not exceed $100 million by the end of each day, with compliance required by April 10.

The decision comes amid mounting pressure on the Indian rupee, which has weakened sharply due to rising oil prices and foreign outflows following geopolitical tensions. Previously, banks could offset positions between onshore and non-deliverable forward (NDF) markets, allowing them to maintain large arbitrage trades without breaching limits. The new cap specifically targets onshore exposure, disrupting this strategy.

As a result, banks may be forced to unwind arbitrage positions estimated between $10 billion and $18 billion. This could lead to increased volatility, widening spreads between onshore and NDF rates, and potential losses as traders exit positions at unfavorable levels. The RBI has also held discussions with treasury officials to assess the market impact of these changes.

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