Regulatory risk restrains bankers from tapping rupee futures-forwards arbitrage

Pricing distortions stemming from the Indian ​central bank's recent foreign exchange ​curbs have opened up arbitrage between exchange-traded rupee futures ​and onshore forwards.

However, bankers are wary of taking positions amid heightened regulatory risks, four market participants said.

The recent spate of measures, including limits on net open FX positions ‌of banks in ⁠the ⁠deliverable rupee market, has led to a reversal of chunky arbitrage banks, unleashing heavy dollar selling in the onshore forward market and pushing dollar/rupee forward rates lower.

The exchange‑traded dollar-rupee ​futures have not fallen to the same extent, opening up an arbitrage window.


The April maturity dollar-rupee future last quoted at around 93.4850, well above ​the onshore forward rate of around 93.25. This ⁠spread would ‌typically woo bankers, who are keeping away as they ​nurse losses on ​arbitrage trades.

There is little appetite to do anything "outside managing ⁠flows and positions" at this stage, a senior treasury ​official at a foreign bank said, requesting anonymity since ​he is not authorized to speak publicly.

"After what the RBI has done, the primary focus is risk management."

During the latest bout of stress on the rupee, the RBI has shown it is willing to double down on measures to support the currency if initial steps fail to deliver ‌the desired impact.

ANOMALIES, SHARP SWINGS

Bankers highlight other market distortions after the RBI's crackdown, citing a spike in the one-day ​FX swap rate ​on Monday and ⁠unusual volatility in the daily fixing, which has moved out of its typically narrow band with wider bid-offer spreads.

While dollar-rupee spot rate has found a base ​near 93, forward premiums have seen erratic moves, driven by unwinding of trades by state-run banks and patchy liquidity.

The 1-year forward implied yield climbed to a multi-year high of 3.96% on Monday before pulling back to around 3.35%. Prior to the RBI's curbs, it was at 2.90%.