Rupee appreciation sets up arbitrage opportunity!

The Indian rupee’s continuous appreciation against the dollar has created opportunities for arbitrage between overseas and domestic markets for foreign banks and companies that have subsidiaries overseas.

To take advantage of this rate differential, a market participant has to buy dollars from the overseas market through its branch there and sell in India through its domestic branch.

The arbitrage, over a period of time, irons out the difference in rates between the two markets.Treasurers of foreign and local banks didn’t want to be identified for this story because they consider arbitrage a sensitive issue, mainly from the regulatory point of view.

Domestic firms and banks that don’t have overseas subsidiaries are not allowed to enter into arbitrage and neither are public sector companies.
“The Reserve Bank of India (RBI) keeps a strict watch on how much arbitrage we can do, and has set limits that are almost minuscule compared with our daily domestic forex operations,” said the head of treasury at a foreign bank. “Honestly speaking, if we could have done free arbitrage, there would have been no difference in rates.”

Source: Livemint