INSUBCONTINENT EXCLUSIVE:
Biggest beneficiaries have been the foreign banks, which have easy access to large dollar stockpilesThe Reserve Bank of India's attempt to
flush out excess United States dollars from the nation's markets has offered a unique arbitrage opportunity for some banks
Lenders are using a regulatory loophole to profit from trading in the currency forward markets, according to people with knowledge of the
A large bank could easily rack up exposures of more than $1 billion, multiple traders said, asking not to be identified as the deals aren't
public.The strategy revolves around a February regulation change that dropped exposure limits local banks have to other sovereign assets,
such as United States Treasuries, which allowed them to take advantage of a spread in the dollar-rupee markets
The RBI's extensive intervention had driven implied 12-month yields for the currency pair to the highest in more than four years.The
biggest beneficiaries have been foreign banks in the nation, which have easy access to large dollar stockpiles, the people said
As the biggest buyer of the greenback in the forwards market, the RBI is effectively funding some of the trading profits.Here's how it
Banks would convert rupee deposits into dollars using a buy-sell swap -- buying the greenback now while selling the same amount at a
specified date in the future
They use the proceeds to purchase Treasuries, under the newly-relaxed RBI rule
The return is in the arbitrage: they pay around 3.5% on local currency deposits, while earning 4.9% on the one-year forward premia.In
discussions, the central bank had made it clear that the lenders should deploy dollars from their own stockpile and not use swaps to make
investments under the newly relaxed rules, the people said
However, the written rules don't define what constitutes the banks' resources to be used for investments -- creating a loophole for the
lenders to get more greenback through swaps.Since there are no longer any limits on how much these banks can invest abroad, there are -- at
An email to an RBI spokesman on Tuesday afternoon was unanswered.When RBI Governor Shaktikanta Das made the rule change on banks exposure to
foreign assets two months ago, the expectation was that it would drive the lenders to use their excess dollars to buy Treasuries, rather
than flood the local market with the greenback.While the banks have done so, they are profiting from the currency markets
To be sure, the February rule-change and these trades have helped to lower the 12-month forward premia to 4.9% from 5.4%, trimming hedging
costs for companies.The RBI had been mopping up capital inflows -- driven by a buoyant stock market and acquisitions -- to such an extent
that its foreign-exchange reserves grew to be the world's fourth-largest
The intervention done through the spot market and sterilized in forwards led to a surge in the 12-month rate.As a result, the central bank's
long-dollar books jumped to $47.4 billion at end-January from a negative $4.9 billion in March 2020.(Except for the headline, this story
has not been edited by TheIndianSubcontinent staff and is published from a syndicated feed.)
