Banks arbitrage gains: How banks turned RBI’s hot money move into lucrative trade strategy


By Suvashree Ghosh and Subhadip Sircar

The Reserve Bank of India’s try to flush out extra {dollars} from the native market has supplied a novel arbitrage alternative for some banks.

Lenders are utilizing a regulatory loophole to make a large revenue, in line with individuals with information of the matter. A big financial institution may simply rack up exposures of greater than $1 billion utilizing this strategy, a number of merchants stated, asking to not be recognized because the offers aren’t public. Top beneficiaries from these trades are overseas banks, which have massive and easy accessibility to greenback stockpiles.

At the middle of the strategy is the RBI’s determination in February to take away limits on native financial institution exposures to different nations and central banks. Governor Shaktikanta Das had been hoping that banks would use their extra {dollars} to purchase U.S. Treasuries, as an example, reasonably than offload them within the native market the place value dislocations had been making it costlier for Indian firms to hedge.

The explanation for concern was the so-called ahead premia — the associated fee to purchase {dollars} at a future date — which was on the highest degree in additional than 4 years. The price had surged partly due to the RBI’s makes an attempt at intervention: its long-dollar guide rose to $47.4 billion at end-January from a destructive $4.9 billion in March 2020. Rather than having to purchase extra {dollars}, Das wished to stop inflows of hot money.

In discussions between officers from the RBI and banks, the RBI made it clear that banks ought to deploy their very own {dollars} overseas, the individuals stated, although written guidelines solely point out “resources” and don’t outline the pool. Banks are utilizing this lack of readability as a loophole to make earnings.

Here’s the way it works. A financial institution converts its rupee deposits into {dollars} utilizing a buy-sell swap, which suggests it buys {dollars} at the moment and agrees to promote the identical quantity of buck at a specified date sooner or later. It makes use of these {dollars} to avail the RBI exemption and buy U.S. Treasuries. The huge return is within the arbitrage: at prevailing charges the financial institution can be paying about 3.5% on its rupee deposit, whereas the one-year ahead premia is 4.9%, netting the financial institution a cool 1.4 share factors of revenue.

Since there are not any limits on how a lot these banks can make investments overseas, there are not any limits on how a lot revenue a financial institution may guide.


The trades aren’t unlawful and there’s no suggestion of wrongdoing. In reality, the February leisure has lowered the ahead premia to 4.9% from 5.4%.

But officers on the RBI are in a quandry. As the most important purchaser of {dollars} within the forwards market, the RBI is successfully funding a few of these buying and selling earnings for banks.

An electronic mail to an RBI spokesman was unanswered.




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