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The rupee strengthened by 1.3% to reach 93.59 per US dollar on Monday, March 30, due to the unwinding of arbitrage as a result of the central bank's restrictions on onshore position limits.

The Reserve Bank of India (RBI) instructed banks on Friday, March 27 to limit their net open positions in rupees in the foreign exchange market to $100 million by the end of each trading day, with full compliance needed by April 10.

The RBI's restrictions on onshore position limits are likely to result in banks selling dollars in the domestic foreign exchange market as they unwind their existing arbitrage trades.

These arbitrage transactions were established by purchasing dollars onshore and selling them in the non-deliverable forward (NDF) market to take advantage of the price difference between the two markets.

The spread has significantly increased due to a rise in volatility and the rupee's decline, driven by heightened risk aversion and oil-related pressures stemming from the Iran conflict.

Estimates suggest that the magnitude of these positions ranges from $25 billion to over $50 billion, as per Reuters news report.

The rupee has faced severe strain due to ongoing portfolio outflows and growing worries about the effects of rising oil prices on India's economic prospects.

In March, the rupee has fallen by more than 4% as of Friday, marking its potential for the worst monthly performance in over seven years.

On Friday, the currency fell nearly 1% to 94.8125, reaching an all-time low of 94.8400.

Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments, said that a significant development today is likely to be strengthening of the rupee in response to the RBI directive capping the net open position (NOP- INR) in the offshore deliverable market at $100 million. Unwinding of large dollar positions will strengthen the rupee in the near-term.

Amit Pabari, MD, Research Team, CR Forex Advisors, said that, the timely action by the RBI could provide much-needed breathing space in the near term, as position unwinding offers temporary support. From a technical perspective, the 92.50–92.80 range may act as a support zone if this unwinding continues, while the 94.80–95.00 levels are likely to remain a key resistance area.

Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.Dhanya Nagasundaram works as a Content Producer at LiveMint, specializing in news related to financial markets, stocks, and business. With over eight years of experience in journalism and content creation, she has honed her skills in data-driven reporting and market analysis. Her focus is on monitoring stock trends, initial public offerings (IPOs), corporate news, policy shifts, and larger economic trends that affect investors and market players.

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