Being a global bank myself I did not care about cross-currency futures and arbitrage, but recent RBI actions made me care.
This article was inspired by the following news items:
Dated 1st April, titled "RBI bars banks from offering NDF contracts to corporates to stabilise rupee" By Business Standard; also authorised dealers will not be allowed to permit rebooking of any foreign exchange derivative contract, deliverable or non-deliverable (a long-standing loophole that allowed market participants to roll over or reprice positions under the guise of hedging, but in reality, often facilitated speculative positioning)
Dated 2nd April, titled "RBI trading ban jolts India's $149 billion-a-day offshore rupee market" by Bloomberg (Only presents a Pro-US stance)
Dated 2nd April, titled "GBP/USD slumps as FTSE slides, Pound tanks 1% against INR" by reported Business Standard
Dated 10th April, titled "RBI to push for reporting of offshore rupee trades despite resistance" by Reuters
Some figures intrigued me:
14900 Cr. USD: daily market size of offshore rupee trading
3000 - 4000 Cr. USD: estimated size of arbitrage trades that banks would have to unwind due to the new cap
500 Cr. USD: estimated SBI's exposure (Bloomberg)
10 Cr. USD: New cap on Regulated Banks for their daily domestic currency positions to be implemented by April 10
3 Cr. USD: SBI's estimated losses from the New cap (Bloomberg)
I can now see exactly how I could have engineered weakness across multiple currency pairs while making some money
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The Real Numbers: March-April 2026
Before RBI's April 1 Curbs
March 31, 2026 (Day Before Restrictions):
USD/INR: 93.4846
GBP/USD: 1.3184 (mid-month average)
GBP/INR: 123.6440
Implied GBP/INR calculation: 1.3184 × 93.4846 = 123.20 (actual: 123.64 – 44 paise overvalued in offshore markets)
The Spread Opportunity:
I could sell GBP/INR expensive in London NDFs (123.64)
Buy cheaper onshore through synthetic construction (123.20)
Profit: 44 basis points on every pound converted
After RBI's April 1-3 Curbs
April 3, 2026 (Just After Restrictions Kicked In):
USD/INR: 92.7637 (strengthened 70 paise from March 31)
GBP/USD: 1.3202 (held relatively stable)
GBP/INR: 122.4666 (fell 119 paise from March 31)
The Damage:
GBP/INR fell 1.0% in 3 days
Implied rate would be: 1.3202 × 92.7637 = 122.45 (perfectly aligned with actual)
The spread collapsed from 44 paise to near zero
Peak Volatility: April 13-14
April 13, 2026:
USD/INR: 94.7215 (spiked unexpectedly)
GBP/USD: 1.3460
GBP/INR: 127.9687
Implied from pair components: 1.3460 × 94.7215 = 127.48
Actual: 127.97 (49 paise overvaluation offshore)
April 14, 2026 (Immediate Pullback):
USD/INR: 93.1660 (dropped 155 paise in one day)
GBP/USD: 1.3460 (unchanged)
GBP/INR: 126.3880 (fell 157 paise)
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The Arbitrage Chain: How It might have Worked in Real Time
Phase 1: March 30-31, 2026 (Before Curbs)
My Coordinated Strategy:
Leg 1 - USD/INR Arbitrage (Onshore: My India Desk)
Buy USD spot at 93.48
Lock forward sale at 93.58
Volume: 80 Cr. USD
Leg 2 - USD/INR Arbitrage (Offshore: My Global Desks)
Sell USD/INR NDFs at 94.50
Receive from clients shorting rupee
Create synthetic "long INR" position
Leg 3 - GBP/USD Arbitrage (Offshore: My London Desk)
Simultaneously sell GBP/USD forwards at 1.3200
Create short GBP, long USD position
Volume: 50 Cr. USD equivalent
The Profit Calculation (March 30):
Trade |
Volume |
Rate |
INR Impact |
Profit |
USD/INR spread (onshore-offshore) |
80 Cr. USD |
94.50-93.48 |
102 paise |
0.816 Cr. USD |
GBP/USD spread (London synthetic) |
50 Cr. USD equiv |
1.3200 |
Cross-currency |
0.320 Cr. USD |
Carry trade (hold rupees in India) |
7480 Cr. INR |
6.5% annual |
31 days |
0.410 Cr. USD |
Total Monthly Profit |
1.546 Cr. USD |
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Phase 2: April 1-3, 2026 (RBI Curbs Strike)
What RBI Achieved
April 1 NDF Ban Impact:
My banks' NDF counterparties evaporated
Offshore buyers of rupee NDFs (non-residents) suddenly banned
I couldn't find sellers for their short rupee positions
Forced Unwinding:
Day 1 (April 1): RBI announces ban at 9:30 AM Mumbai time
Offshore GBP/USD remains stable (1.3202)
But I must exit 80 Cr. USD dominated USD/INR position
I sell USD, buy INR back
Sudden onshore rupee demand: 80 Cr. USD into a 5000 Cr. USD daily market = 1.6% impact
Day 2 (April 2): Other Banks continue unwinding
USD/INR: 92.9687 (strengthens further)
Non-Indian global banks all reducing positions simultaneously
Estimated 200-300 Cr. USD collective unwinding
Day 3 (April 3): Critical moment
USD/INR: 92.7637 (rupee now 70 paise stronger than March 31)
But I redirect capital to GBP shorts
Offshore GBP selling accelerates as hedges are broken
GBP/INR: 122.4666 (1% weaker from March 31)
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The Triangular Mechanism: Why GBP Fell Despite USD Strength
The Counter-Intuitive Outcome
Normally, if USD strengthens:
GBP should strengthen too (both "safe haven" currencies)
GBP/INR should rise slightly
What actually could have happened:
USD strengthened vs INR (93.48 → 92.76 = INR appreciated)
GBP weakened vs INR (123.64 → 122.47)
This only makes sense if GBP was actively sold
The Capital Redeployment Strategy
My Logic on April 2:
"I must exit USD/INR shorts due to RBI ban. But I still have 50 Cr. USD dominated GBP shorts from my complementary position. Instead of admitting defeat, let's:
Sell the USD/INR position to RBI (forcing INR appreciation)
Simultaneously increase GBP selling (redirect capital from unwound USD/INR trade)
The offshore market will interpret USD strength + RBI unwinding as signal that USD is no longer attractive relative to GBP
Short GBP aggressively, knowing:
RBI doesn't regulate GBP/USD
Hedge funds will follow (momentum trading)
We profit from GBP weakness"
The Math:
Item |
Amount |
Impact on GBP/INR |
Capital freed from unwound USD shorts |
80 Cr. USD |
Available for redeployment |
Additional GBP shorts established |
80 Cr. USD + original 50 Cr. USD |
Equivalent to 130 Cr. USD selling pressure |
Leverage on GBP shorts (10x) |
1300 Cr. USD notional |
Massive offshore impact |
Offshore GBP weakness signals |
Cascade effect |
Hedge funds pile on |
Final GBP/INR impact |
|
-1.0% in 3 days |
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The April 13-14 Spike: Proof of Concept
Why GBP/INR Hit 127.97 on April 13
The conditions would have converged unexpectedly:
April 13 Morning:
Global news: Oil prices spike again (Iran tensions renewed)
Capital flows: FPIs sell Indian equities aggressively
INR panic: Traders sell rupees across all pairs
USD/INR shoots to 94.72 (highest since March 30)
If GBP/USD would remain unchanged:
Expected GBP/INR: 1.3460 × 94.72 = 127.48
Actual GBP/INR: 127.97
49 paise over-valuation = speculative positioning
Who could have bought?
- Hedge funds betting on continuing rupee weakness
- Offshore investors hedging INR through GBP
- The very banks that shorted GBP taking profits
April 14: Reality Check
April 14 Morning (Tuesday):
Markets digest that rupee weakness was temporary
Oil news fades as Iran tensions de-escalate
FPI selling slows
Traders cover short positions
Collapse:
USD/INR: 93.1660 (155 paise drop in one day)
GBP/USD: 1.3460 (unchanged)
GBP/INR: 126.3880 (157 paise drop)
This would confirm: The April 13-14 volatility in GBP/INR would be speculative layering, not fundamental. Once the trade unwound, so would the artificial pricing.
Who Profited: The Winners and Losers
The Winners
Me and other global banks
The Losers
Indian Importers
GBP costs spiked 1% in early April
Any GBP-hedged contracts became expensive
Estimated cost: 2,000-3,000 Cr. INR across sector
Foreign Portfolio Investors
INR volatility scared away capital
April saw 80 Cr. USD net FPI outflow
Blamed on "rupee uncertainty" (actually arbitrage unwinding)
RBI
Forced to burn 129 - 150 Cr. USD in reserves defending rupee
April 13-14 spike forced emergency interventions
All to combat what should have been impossible with their April 1 curbs
Rates sourced from Federal Reserve (GBP/USD), Pound Sterling Live (GBP/INR), and Exchange Rates UK (USD/INR) for April 2026.