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Bloomberg
The Reserve Bank of India (RBI) relaxed a rule on bank’s purchases of foreign sovereign bonds, paving the way for lenders to resume a profitable currency trade.
In a notice sent to some banks, the RBI said foreign sovereign bonds wouldn’t fall under a regulatory cap that requires holdings of securities unlisted in India to be 10% or less of the total non-statutory liquidity ratio portfolio. The RBI’s decision comes after banks made a representation seeking relaxation.
Earlier this month, the RBI had told some lenders to unwind trades that were in breach of the 10% limit.
Some lenders had racked up exposures of more than $1 billion each by using a regulatory loophole created in February to convert rupee deposits into dollars using a buy-sell swap — buying the greenback now while selling the same amount at a specified date in the future. They then used the proceeds to purchase US government debt and profited from the arbitrage, paying around 3.5% on the local currency deposits and earning 4.9% on the 12-month yield on the currency pair.
“The relaxation will cap upside to the forward premia and help banks to resume the trade once paying picks up in the dollar/rupee swap market,†said Nitin Agarwal, head of trading at Australia & New Zealand Banking Group Ltd. in India.
A spokesman for the RBI didn’t immediately respond to an email seeking a comment.