The arbitrage trade that triggered the crackdown

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The rupee's dramatic slide past 94 to the dollar on Tuesday was not simply a reaction to global risk-off sentiment. Behind the scenes, a significant regulatory intervention by the Reserve Bank of India has forced a large and disorderly unwinding of bank positions — and according to one of India's most experienced currency strategists, the market may not find its footing for several days yet. Abhishek Goenka , Founder of IFA Global, who has tracked the rupee through multiple crises over a 25-year career, told ET Now that the RBI has effectively run out of conventional tools and is now deploying more forceful measures to rein in what had become a sprawling arbitrage trade between India's onshore spot market and the offshore non-deliverable forward market.For weeks, Indian banks had been building positions that exploited the price difference between the spot rupee and the NDF market in Singapore. The RBI, which had already accumulated a short dollar position of close to $100 billion through aggressive market intervention, identified these trades as destabilising and moved to cap each bank's net open position at $100 million.The immediate consequence was brutal. Banks were forced to sell dollars in the spot market and simultaneously buy in the forward market — creating a violent one-directional move at the opening. The spread between the one-year NDF and onshore forward rates widened to nearly one rupee, a dislocation Goenka said had not been seen since the Covid-19 crisis of 2020."Whenever RBI falls short of simple measures, they come all in," Goenka said. "They have been talking to a lot of authorised dealer banks, checking their positions, and finally acted."With an estimated $30 billion in positions needing to be squared off across both spot and NDF markets, Goenka was emphatic that the adjustment cannot be compressed into a single trading session. The sheer volume of liquidity required makes a multi-day unwind inevitable — and the timing is complicated by the fact that March 31 marks the end of the financial year, leaving fewer active corporate participants in the market to provide natural counter-liquidity.The RBI, through state-run banks, is expected to remain the dominant buyer, effectively setting the floor for where the rupee stabilises in the near term.Beyond the mechanical unwind, Goenka flagged two variables that remain entirely outside the RBI's control and could extend the rupee's weakness well past the current episode.The first is the trajectory of the West Asia conflict. At the time of the interview, Goenka noted that no party was backing down, keeping energy prices elevated and risk sentiment fragile. The second is the US Federal Reserve. Until the Fed begins cutting interest rates, the interest rate differential between India and the United States remains wide — keeping structural pressure on the rupee intact regardless of RBI action.Goenka drew on two previous rupee crises to frame the medium-term outlook. In 2013, the currency moved from 56–57 all the way to 68 in four months before snapping back to 59 within a month. In 2008, it swung from 39 to 52. In both cases, the eventual mean reversion was sharp.His base case is that the rupee depreciates by around 10% through this cycle — consistent with its long-run average annual depreciation of 2.5–3% compounded over the period of stress. At current levels, combined with an elevated forward premium and even higher NDF premiums, he argued that selling dollars now carries limited downside risk over a medium to long-term horizon."I do not think that if you sell dollars at current levels you are going to lose," he said.