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)