Rupee jumps 1.22 paise at open as RBI curbs trigger arbitrage unwinding

The Indian rupee opened sharply stronger on Monday (March 30), gaining 1.22 paise to trade at 93.59 per dollar compared with Friday’s (March 27's) close of 94.81, as banks began unwinding arbitrage positions in line with the Reserve Bank of India’s latest directive.

Late on Friday (March 27), the RBI instructed banks to cap their net open rupee positions in the onshore market at $100 million by the end of each business day, with compliance required by April 10.

The move is expected to prompt banks

to sell dollars in the domestic market, reducing open positions and helping curb the rupee’s recent slide.

Arbitrage trades, which had been built by buying dollars onshore and selling them in the NDF (non-deliverable forward) market, were designed to exploit widening spreads between the two segments. These spreads had expanded amid heightened volatility, risk aversion, and oil-related pressures linked to the Iran conflict. Market participants estimate the size of such positions to range from $25 billion to over $50 billion.

The rupee has faced intense downward pressure in March, dropping more than 4% through Friday—the worst monthly performance in over seven years. Friday alone saw the currency fall nearly 1% to 94.8125, hitting an all-time low of 94.84.

The central bank has been active in both the onshore and NDF markets, seeking to support the rupee and slow the pace of its decline.

“Any initial dip in dollar/rupee should see importer bids come in quickly, while banks keep cutting positions. Hard to call where this settles," said a currency trader at a private sector bank.

Traders also noted that banks could incur significant losses as they unwind positions at much wider spreads than those at which they were initiated.

-With Reuters inputs