NDF surge tops $3.7 billion as RBI curbs trigger arbitrage rush; rupee swings sharply: Report

Indian corporates sharply ramped up activity in the non-deliverable forwards (NDF) market on March 30, with volumes crossing $3.7 billion — nearly seven times the usual levels — highlighting a surge in arbitrage trades triggered by recent regulatory changes. The spike followed the Reserve Bank of India’s (RBI) move to restrict banks’ net onshore open foreign exchange positions, which forced lenders to unwind existing trades and recalibrate their exposure, Reuters reported.

As banks rushed to square off positions, they began selling dollars in the domestic (onshore) market while simultaneously buying dollars in the offshore NDF market. This dual action widened the price gap between onshore and offshore markets, opening up arbitrage opportunities. Corporates moved quickly to capitalise on this dislocation by buying dollars domestically and selling them in the NDF market, locking in gains from the spread.

Data from the Clearing Corporation of India underscores the scale of this activity. Client volumes in the NDF segment surged to $3.7 billion on March 30, compared to typical daily levels. Notably, corporate participation was heavily skewed toward dollar selling, which accounted for $7.51 billion of the total, while dollar purchases were negligible at just $24 million.

The surge in arbitrage-driven trades also explains why the RBI’s initial measures did not immediately strengthen the rupee. Despite a brief uptick, the currency weakened sharply on March 30, slipping past the 95 per US dollar mark to hit a record low, as strong onshore dollar demand from corporates outweighed the impact of regulatory tightening.

In response, the RBI has since stepped up its intervention. It has barred banks from offering NDF products to clients and restricted companies from rebooking cancelled forward contracts—moves aimed at curbing speculative and arbitrage-driven activity. These tighter controls appear to have stabilised the currency, with the rupee recovering to around 93 per US dollar in subsequent sessions.

Overall, the episode highlights how regulatory shifts can temporarily distort currency markets, creating short-term opportunities for corporates while complicating the central bank’s efforts to manage exchange rate volatility.