Reserve Bank of India Investigates Banks Over Rupee Arbitrage Transactions

The Reserve Bank of India (RBI) is scrutinizing the methods used by major banks to unwind their rupee arbitrage positions, amid concerns that these trades may have violated regulations and hindered efforts to stabilize the Indian currency. The investigation follows a significant intervention by the RBI aimed at addressing the rupee's depreciation, which had reached record lows due to geopolitical tensions in the Middle East and substantial foreign capital outflows.

RBI Investigates Banks Over Handling of Rupee Arbitrage Unwinding RBI Probes Banks Over Rupee Arbitrage Exit Strategy, Checks Corporate LinkagesReutersBloomberg

In late March and early April 2026, the RBI compelled banks to unwind approximately $40 billion in rupee arbitrage trades between onshore and non-deliverable forward markets. This action was taken as the rupee fell by 4% in March, exacerbated by over $19 billion in foreign outflows from India's debt and equity markets. Following the RBI's measures, the rupee recovered from around 95.20 to approximately 92.50 per U.S. dollar, although it later lost some of these gains.

Reuters

Deputy Governor T. Rabi Sankar expressed concerns at a recent foreign exchange dealers' conference in Paris regarding banks transferring arbitrage trades to corporate clients, which is against the RBI's regulations. The central bank is investigating whether banks offloaded these trades to corporates and related parties, potentially undermining the objective of increasing dollar liquidity in the market. Sources indicate that the RBI has reached out to treasury officials at several large banks to review transaction details and communications related to these trades.

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The RBI's scrutiny is notable as it signals a commitment to closely monitor market behavior, particularly in light of the recent volatility. If banks are found to have engaged in market abuse by encouraging corporates to build arbitrage positions, they could face regulatory consequences.

Reuters

While the RBI has not issued an official statement regarding the ongoing investigation, its actions reflect a broader strategy to stabilize the rupee and curb speculation. The central bank has previously implemented measures to limit currency bets by banks to $100 million each and has prohibited them from entering derivative contracts in offshore markets. These restrictions were aimed at reducing excessive volatility and ensuring that banks comply with the spirit of the RBI's regulations.

Bloomberg

Critics of the RBI's approach argue that the stringent measures may deter foreign investment and create an environment of uncertainty in the currency markets. Some market participants have expressed concerns that the central bank's interventions could lead to a loss of confidence among investors, particularly if regulatory scrutiny is perceived as excessive.

Reuters

As the RBI continues its investigation, it plans to advance a proposal requiring banks to report offshore rupee derivative trades. This move is part of a broader effort to enhance transparency and ensure compliance with foreign exchange regulations. The outcome of the investigation and any potential penalties for non-compliance remain uncertain, but the RBI's actions underscore its commitment to maintaining currency stability amid challenging market conditions.

RBI Investigates Banks Over Handling of Rupee Arbitrage Unwinding RBI Probes Banks Over Rupee Arbitrage Exit Strategy, Checks Corporate Linkages