Outstanding positions on the dollar-rupee futures contract expiring next week tripled in the last fortnight to over $3.7 billion, the highest in more than a year, likely due to arbitrage trades and central bank intervention, bankers said.
Surging open interest has brought with it familiar pressure from arbitrage trades on the Indian currency, albeit on a smaller scale.
The Reserve Bank of India had imposed limits on banks' net open positions in March to curb such trades between the onshore deliverable and non-deliverable forwards markets that had grown to over $30 billion, contributing to the rupee sinking to its then-record low.
Arbitrage opportunities, which aim to profit from minor gaps in pricing across market segments, have now emerged in the less-used rupee futures market.
Some lenders have entered into trades that benefit from pricing gaps between the rate at which dollar-rupee futures are quoting on India's National Stock Exchange versus the non-deliverable forward market, three bankers said, requesting anonymity to speak to the media.
"This massive surge in market participation was after August 5, when the spread between the near-month future and the one-month forward began to expand," said Dilip Parmar, a currency research analyst at HDFC Securities.
The RBI held its policy repo rate at the end of its most recent monetary policy committee meeting on August 5. The central bank has been intervening via dollar sales in the futures market over the last week, maintaining a presence across market segments to steady the rupee, the bankers said.
India's exchange traded futures market is currently dominated by local banks following a tightening of rules by the Reserve Bank of India in late 2024. Limited liquidity creates room for such pricing mismatches, a fourth banker explained, also speaking on the condition of anonymity.
The dollar/rupee August futures contract expiring next Thursday was quoted around 95.67, trading at a discount to even the local spot rate of 95.74 and to comparable contracts in the onshore deliverable and non-deliverable forward markets.
The arbitrage comes at a time when the rupee remains caught between persistent dollar demand and heavy RBI intervention. Higher oil prices and hedging by importers have repeatedly piled pressure on the rupee.
The bankers said the current arbitrage activity between the market and currency futures was much smaller than the build-up earlier this year and is unlikely to have a meaningful bearing on spot dollar/rupee rates.
The rupee has declined about 6.5% year-to-date versus the dollar and is among the worst performers in Asia.
