The Zhitong Finance App learned that traders said on Thursday that the large demand for US dollars in the non-delivery forward (NDF) market has expanded arbitrage with India's onshore market, putting more pressure on the rupee, making it only one step away from another historical low.

The rupee exchange rate fell to 85.7900 rupees per dollar, not far from the historic low of 85.8075 rupees hit last Friday. The rupee opened weakly at 85.7025 and has been under pressure ever since.

The rupee repeatedly hit record lows in December due to the rise in the dollar index and US Treasury bonds. India's declining economic growth rate, widening trade deficit, and slowing capital inflows have exacerbated its plight.

In the current market environment, speculators have been buying dollars versus rupees in large quantities in the NDF market, which has stimulated onshoreOTC tradingArbitrage opportunities in the (OTC) market. For example, traders said that the NDF exchange rate of the US dollar to rupee was 4-6 passas higher than the onshore OTC exchange rate on Thursday.

The head of foreign exchange and interest rate trading at a private bank said, “Not only is it a one-month period, but arbitrage of various terms is good.” At the same time, he pointed out that the spread between the two interest rates widened on Thursday.

He said, “As the new year approaches, it seems that new capital (in the NDF market) will work.”

To take advantage of arbitrage, market participants buy USD/Rs on the onshore OTC market (this increases the value of the currency pair in this market) and then sell it on the NDF market.

One from a bankForeign exchange transactions“Unless we see significant changes in the dollar outlook, you can't expect the NDF to relax” and the rupee will “struggle”, the official said.

The US dollar index has been hovering at its highest level in more than two years, and is now well supported by the expectation that US President-elect Donald Trump will raise trade tariffs.