By Jaspreet Kalra

MUMBAI, March 30 (Reuters) – The Indian rupee bounced back sharply on Monday from a record low against the dollar, after the central bank tightened limits ‌on banks’ forex positions, sparking onshore dollar selling as traders rushed to cut arbitrage positions.

The ‌rupee rose nearly 1% to 93.85 per dollar in early trading, recovering from 94.84 hit on Friday.

The Reserve Bank ​of India late Friday directed banks to cap their net open rupee positions in the foreign exchange market at $100 million by the end of each business day, with compliance required by April 10.

The move is expected to spark a wave of unwinding in arbitrage positions. These are trades in which banks ‌seek to profit from the gap ⁠between the non-deliverable and onshore forwards market, bankers said.

That unwinding will likely push banks to sell a significant amount of dollars in the local market, ⁠traders said, early signs of which were already visible as the rupee strengthened across both the onshore spot and forward markets.

The 1-month USD/INR outright forward was last at 94.13, down from near 95.15 on Friday.

The ​stringent ​curbs limit both the size of speculative wagers and ​arbitrage positions in a period when market ‌turmoil has seen the rupee depreciate over 4% so far in March, as the energy shock from the war in the Middle East raises growth and inflation risks for Asia’s third-largest economy.

Bankers have urged the RBI to grant them three months to comply with the directive as they fear a disorderly unwinding could leave them exposed to sharp losses.

“Some people are still waiting on potential ‌relaxation by the RBI and if those positions are ​also cut, USD/INR could take another leg lower,” a ​trader at a state-run bank said.

The RBI’s ​curbs come at a time when the central bank has also been actively ‌intervening in FX markets to shield the ​local currency from global ​market volatility triggered by the war in the Middle East.

On the day, India’s equity benchmark index the Nifty 50 slipped 0.5% while the yield on the benchmark 10-year bond ticked ​up 1 bp to 6.74%.

Brent ‌crude rose 2% to $115.25 a barrel, bringing its gains for the month to near ​60%, topping the jump that followed Iraq’s invasion of Kuwait in 1990.

(Reporting by Jaspreet ​Kalra; Editing by Mrigank Dhaniwala and Ronojoy Mazumdar)