RBI Investigates Banks Over Handling of Rupee Arbitrage Unwinding

New Delhi: The Reserve Bank of India has initiated a detailed review of foreign exchange transactions carried out by major banks, amid suspicions that some institutions may not have fully complied with directives related to unwinding rupee arbitrage positions.

According to sources familiar with the matter, the central bank is closely analysing how lenders exited these trades after it nudged them to scale back positions worth nearly $40 billion. The move was part of a broader effort to stabilise the domestic currency, which had been under pressure due to global geopolitical tensions and sustained foreign capital outflows.

During the period spanning late March to early April, banks were encouraged to reduce arbitrage exposure between the domestic currency market and offshore non-deliverable forward (NDF) segments. These steps came as the rupee hovered near record lows against the U.S. dollar.

Following the intervention, the currency showed signs of recovery, strengthening from around 95 per dollar levels to nearly 92.5 before giving up some gains in subsequent sessions.

However, fresh concerns have emerged within the regulator that certain banks may have transferred portions of these positions to corporate entities or affiliated parties instead of fully closing them. Such actions, if confirmed, could dilute the intended impact of RBI’s measures aimed at improving dollar liquidity and easing depreciation pressure on the rupee.

As part of its review, the central bank has reportedly reached out to treasury divisions of several large banks, seeking detailed information on client dealings and transactions involving related entities. The exercise also includes scrutiny of communication records and deal structures executed during the unwinding phase.

Officials have not disclosed the names of the banks under review, and there is no clarity yet on potential regulatory consequences if any irregularities are established.

The RBI has not issued an official statement on the matter so far.