India central bank lifting curbs on forex non-deliverable forward arbitrage by banks

INDIA’S central financial institution is easing restrictions on banks’ arbitrage trades between the outright international change over-the-counter (OTC) and the non-deliverable ahead (NDF) markets, 4 folks conversant in the matter mentioned.

The Reserve Bank of India (RBI) has allowed banks, which have made requests, to renew such trades, an individual straight conversant in the central financial institution’s considering mentioned. “There have been banks who have called and asked whether they can start doing it,” and the central financial institution has accredited, this individual mentioned.

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

Arbitrage trades enable buyers to learn from the worth variations of securities in numerous markets however can exaggerate value developments.

The RBI had imposed a casual ban on greenback/rupee arbitrage trades in August 2023, when it was intervening to stop the rupee from slipping to a report low, whereas banks had been benefiting from value variations between the OTC and NDF markets.

Banks’ arbitrage positions “had ballooned” and had been “running into double-digit billions of dollars”, which the RBI “was not happy with”, the individual straight conversant in the central financial institution’s considering mentioned.

Now, the RBI needs to keep away from a repeat and is asking banks to do arbitrage in a manner that “shouldn’t adversely impact the currency”, he mentioned.

“We had sought permission from RBI last week and they said you can go ahead,” the chief supervisor at a mid-sized public sector financial institution mentioned on Monday (Feb 26). The financial institution had not but began constructing its FX arbitrage e book.

All the individuals declined to be named since they aren’t authorised to talk to the media.

The RBI didn’t instantly reply to an e mail looking for remark.

The lifting of the NDF arbitrage restrictions comes at a time when the Indian rupee is having fun with a interval of tranquillity.

The foreign money’s 30-day realised volatility has been under 2 per cent since October, and volatility expectations are decrease than Asian friends. The low volatility has meant that the rupee’s OTC and NDF charges not often diverge and never by a lot, resulting in fewer arbitrage alternatives.

The RBI has permitted arbitrage trades, “but in a limited way and slowly,” a dealer on the second public sector financial institution mentioned.

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