India Banks Moved Arb Trades to Corporate Books, Stoking RBI Ire

India’s central bank drastically tightened currency market rules after it realized lenders were circumventing an earlier measure by shifting potentially speculative arbitrage trades onto client books, according to people with knowledge of the matter.

The rupee ended weaker Monday despite the Reserve Bank of India forcing banks to unwind certain local short-rupee trades, prompting authorities to seek data on lenders’ offshore positions, the people said. The RBI assessed that banks — which until then had been buying dollars locally and selling them at a profit offshore — were quietly passing on that trade to their corporate clients, the people added, asking not to be identified due to the sensitivity of the matter.