RBI raps forex players, maintains firm stance to defend currency

Mumbai: A senior Reserve Bank of India (RBI) official has criticised foreign-exchange market makers for worsening pressure on the rupee during recent Middle East tensions, as the central bank maintains a firm stance to defend the currency.

Speaking at an annual forex dealers’ conference in Paris, Deputy Governor T Rabi Sankar said arbitrage between onshore and offshore markets strained dollar liquidity at a time of heavy foreign outflows, according to people familiar with the matter.

The remarks follow RBI’s recent crackdown on speculative currency trades. The central bank capped banks’ currency positions at $100 million and barred them from entering offshore derivative contracts. This move forced lenders to unwind nearly $30 billion in arbitrage trades, where dollars were bought locally and sold overseas.

Sankar also flagged concerns over banks shifting such trades to corporate clients, even though companies are not permitted to undertake these transactions.

He further disapproved of other mechanisms used by banks to move exposures off their books.

Earlier, RBI Governor Sanjay Malhotra noted that arbitrage positions had surged toward the end of March. While such linkages aid price discovery under normal conditions, he warned that excessive volatility and rapid build-up of positions could destabilise markets.

He added that the curbs are temporary and aimed at curbing speculation against the rupee.

Since the measures were introduced, the rupee—after nearing the 100-per-dollar mark—has rebounded about 2 per cent, emerging as Asia’s best-performing currency this year as banks rushed to unwind bearish bets ahead of an

April 10 deadline.