Recently, the Reserve Bank of India is trying to flush out excess dollars from the market. This has created a loophole for local banks to make a unique opportunity.
Lenders are trying to make a sizable profit through this loophole, according to experts in this matter. A large bank could easily rack up exposures of more than $1 billion using this strategy, multiple traders said, asking not to be identified as the deals aren’t public. The top beneficiaries of these trades are foreign banks, which have large and easy access to dollar stockpiles.
At the center of the strategy at RBI is to remove the limit for all local banks for foreign exchange. Governor Shaktikanta Das is expecting local banks to use their excess US dollars to buy their treasuries. The center is expecting them to buy US treasuries and not offload them in the local market.
This concern is called forward Premia, the cost of buying dollars at a future rate. Hence, it is expected to be the highest rate in the last four years.
However, in the discussion, the Reserve Bank of India made it clear that banks deploy their own dollars over the boundaries. The people said, though written rules only mention “resources” and don’t define the pool. Banks are using this lack of clarity as a loophole to make profits.
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