India’s Central Bank Eases Restrictions on Forex Trading
Arbitrage Trades Resuming
India’s central bank is relaxing restrictions on banks’ arbitrage trades between the foreign exchange over-the-counter (OTC) and the non-deliverable forward (NDF) markets, according to sources familiar with the matter. The Reserve Bank of India (RBI) has permitted banks to resume such trades upon request, aiming to balance market stability while allowing for profitable opportunities.
Banks Adapt to New Guidelines
Following an informal ban in 2023 due to escalating arbitrage positions, the RBI is now emphasizing responsible trading practices. Public-sector and private-sector banks have been granted permission to engage in arbitrage trades, albeit with caution to prevent past issues from recurring.
Market Tranquillity and Reduced Volatility
Amidst a period of low volatility in the Indian rupee, the lifting of NDF arbitrage restrictions comes as a welcome development. With reduced arbitrage opportunities due to minimal divergence between OTC and NDF rates, banks are adjusting their strategies to adapt to the current market conditions.
Slow but Steady Approach
Traders note that while arbitrage trades are permitted, the current market conditions offer limited opportunities. Banks are proceeding cautiously, prioritizing stability over rapid trading activity to ensure minimal impact on currency fluctuations.
Overall, the easing of NDF arbitrage restrictions reflects the RBI’s efforts to strike a balance between market dynamics and financial stability. By allowing banks to resume arbitrage trades under revised guidelines, the central bank aims to foster a healthy trading environment while mitigating potential risks.
