India’s central bank has activated crisis-era measures to support the rupee, which has fallen to an all-time low as oil prices soared and foreign investors pulled money out at a record pace.
Amid the strain, the Reserve Bank of India (RBI) has stepped in to curb speculative activity via arbitrage trades.
Here is what the central bank is trying to achieve through its measures.
What has the RBI done?
The RBI has announced two rounds of measures to support the rupee.
Last Friday, the RBI capped the net open rupee position of banks at $100 million compared with its earlier rule where positions equivalent to 25 per cent of capital were permitted. A few days later, on Wednesday, it said banks can’t offer rupee non-deliverable forwards to resident and non-resident clients.
What are the reasons behind the move?
The RBI’s moves followed a near 4% depreciation in the rupee in March, over and above an about 4% depreciation in the prior 12 months.
While some of the declines were due to weakening external fundamentals – foreign outflows and higher oil prices – a popular arbitrage trade had added to the pressure on the currency.
This so-called rupee basis trade involved profiting from differences between rupee forward rates onshore and in the NDF market.
The trade itself is relatively straightforward. When NDFs imply a weaker rupee than onshore markets, traders can arbitrage the gap by selling dollars in the NDF market while buying dollars onshore.
This adds to dollar demand in an already strained local market and accelerates the fall in the rupee. It also dulls the impact of FX market interventions by the central bank and puts more pressure on its forex reserves.
How large is the arbitrage trade?
Bankers estimate that across state-run, private and foreign lenders, banks had built up positions of about $30 billion to $40 billion with a significant chunk of the activity occurring since the Iran war broke out.
Do the rules amount to capital controls?
Not really. No additional restriction has been imposed on withdrawing capital from India.
What the steps do mean is that banks and corporates will only be able to hedge genuine underlying exposures/dollar requirements while making it significantly harder for both to put on large speculative wagers on the currency.
What does this mean for corporates and banks?
The moves could leave banks saddled with chunky losses as they rush to unwind arbitrage positions, an objective made even costlier by the central bank’s decision to bar lenders from offering corporates NDF contracts.
The cost of cutting positions to RBI levels largely depends on the spread between the onshore market and the offshore NDF. A wider spread raises the cost of unwinding positions, and consequently, increases losses.
The move has also led to a sharp rise in hedging costs for overseas investors who typically rely on NDFs to hedge currency risk.
What does this mean for the rupee?
The rupee is expected to benefit from the measures as the unwinding of arbitrage positions would spark a bout of heavy dollar sales in the onshore market.
The flip-side, though, is that the measures could create a disconnect between the onshore and NDF market while also denting the central bank’s previous efforts to integrate the two markets.
Published on April 2, 2026
