Indian banks are set to face heightened uncertainty on Thursday after the ‌central bank's curbs on corporate activity made it costlier for lenders to ​cut arbitrage positions, potentially saddling them with larger losses.

Late on Wednesday, the ⁠Reserve Bank of India barred banks from offering rupee non-deliverable forwards to resident and non-resident clients.

The move was aimed primarily at halting a surge in corporate-driven arbitrage activity seen on Monday, four ‌bankers said, requesting anonymity since they are not authorised to speak to the media.

With corporates no longer able to arbitrage between the onshore and NDF ‌markets from Thursday, banks will find it harder and more expensive to unwind ‌positions ⁠the RBI has asked them to cut, they said.

The central bank, ⁠in effect, was directing lenders to cut arbitrage positions that were considered lucrative and low-risk and were compounding the pressure on the rupee.

On Monday, banks had relied on corporate arbitrage flows to help reduce exposures ​in line with the RBI's earlier ‌directive.

"Banks that did not cut on Monday and chose to wait will now have to pay a much steeper price," a senior treasury official at a private sector bank said.

"The market knows they need to cut positions and have ‌little choice, and will demand a premium."

Bankers estimate sizeable positions are outstanding. ​Of the estimated $30 billion-$40 billion in arbitrage exposure, only around 50%-60% were unwound on Monday, leaving a substantial overhang in the system.

The treasury official ⁠said his bank, along with most foreign banks, had reduced positions to within RBI limits on Monday, while most state-run banks were yet to fully exit.

STEEP COST

Banks saddled with ‌positions now face a tougher exit path following Wednesday measures.

The cost of cutting positions to RBI levels largely depends on the spread between the onshore market and the offshore NDF. A wider spread raises the cost of unwinding positions, and consequently, increases losses.

The spread in the 1-month tenor had widened to nearly 100 paise on Monday before narrowing to around 30-40 paise, helped by corporate arbitrage activity.

With those arbitrage flows ‌now curtailed, the spread has widened again to about 100 paise on Thursday, lifting exit costs for ​banks.

SUPPORTING RUPEE

The RBI's clampdown on position limits of banks was aimed at supporting the rupee, which has been under pressure from persistently high oil ⁠prices linked to the Iran war.

However, the impact was blunted when corporates stepped in to ⁠exploit arbitrage opportunities, contributing to the rupee slipping to an all-time low of 95.21 on Monday.

Analysts said the crackdown on corporate arbitrage was aimed at ‌plugging a loophole that had hindered the rupee's rise.

"The latest set of measures by the RBI marks a clear and coordinated shift towards tightening speculative ​activity and reasserting control over rupee dynamics," Kunal Sodhani, head treasury at Shinhan Bank, said.

Published on April 2, 2026