RBI Clampdown on Rupee Speculation Triggers Market Dislocation

The Reserve Bank of India’s crackdown on speculation against the rupee has come at the cost of a broader market disruption.

After the central bank imposed a $100 million cap on banks’ onshore currency bets on Friday, lenders rushed to unwind arbitrage trades — buying dollars abroad and selling them locally. That pushed speculative activity into overseas markets, which the RBI quickly shut off late Wednesday by barring banks from offering non-deliverable forwards, the most widely used offshore rupee instrument.