The rupee reversed its falling trend on Monday, March 30, strengthening 1.3% to 93.59 against the US dollar, driven by the unwinding of arbitrage positions following the central bank’s curbs on onshore position limits.
The Reserve Bank of India (RBI) instructed banks on Friday, March 27, to limit their net open positions in rupees in the foreign exchange market to $100 million by the end of each trading day, with full compliance needed by April 10.
The RBI’s restrictions on onshore position limits are likely to result in banks selling dollars in the domestic foreign exchange market as they unwind their existing arbitrage trades.
These arbitrage transactions were established by purchasing dollars onshore and selling them in the non-deliverable forward (NDF) market to take advantage of the price difference between the two markets.
The spread has significantly increased due to a rise in volatility and the rupee’s decline, driven by heightened risk aversion and oil-related pressures stemming from the Iran conflict.
The rupee has faced severe strain due to ongoing portfolio outflows and growing worries about the effects of rising oil prices on India’s economic prospects.
In March, the domestic unit has fallen by more than 4% as of Friday, putting it on track for the worst monthly performance in seven years. On Friday, the currency fell nearly 1% to 94.8125, reaching an all-time low of 94.84.
Experts indicate that the RBI’s decision comes at a moment when the rupee is facing significant pressure. Friday was especially challenging, with the currency beginning the day weaker at over 94 and continuing to lose value, reaching a new record low around 94.84. This decline showcased increasing apprehension in the market.
Further, experts also noted that the fundamental issue behind this weakness lies in the global situation. Hopes for reduced tensions between the US and Iran have diminished, leading to a return of risk aversion. When uncertainty increases, markets tend to gravitate towards safer assets, which boosts the dollar and puts downward pressure on emerging market currencies such as the rupee.
Rupee outlook
Kunal Sodhani, Head – Treasury at Shinhan Bank, said that RBI, by enforcing a uniform limit, is effectively forcing banks to unwind large long-dollar positions, with estimates suggesting USD 10–18 billion of positions could be squared off in the near term, leading to immediate dollar selling and short-term support for the INR.
The measure also disrupts onshore–offshore arbitrage, compressing NDF spreads and reducing speculative activity, he said, adding that while it acts as a form of “synthetic intervention” without depleting reserves, it may tighten liquidity and increase hedging costs.
Going ahead, the rupee’s trajectory will again be dictated by fundamentals such as oil prices, FPI flows, and US dollar strength, said Sodhani after unwinding is absorbed.
Amit Pabari, MD, Research Team, CR Forex Advisors, said that the timely action by the RBI could provide much-needed breathing space in the near term, as position unwinding offers temporary support. “From a technical perspective, the 92.50–92.80 range may act as a support zone if this unwinding continues, while the 94.80–95.00 levels are likely to remain a key resistance area.”
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