Interest Rate Arbitrage

Arbitrage, within the context of financial markets, refers to the practice of trading on, and profiting from, a current or expected inconsistency in the pricing of an asset or group of assets. It is, in precise terms, leveraging on the difference between the price or the value of a security in two markets.

Considering the continuous rise of the US $ as compared to INR, Interest Rate Arbitrage is becoming one of the most potent tools used by HNIs, FIIs and NRIs to milk the interest rate difference between the US emerging markets like India

The rising dollar rate versus the rupee has created a lot of arbitraging opportunities. NRIs remit more to earn extra buck for their hard earned money. The basic fundamental here is to borrow money in dollars and lend the same in Indian rupees to gain from the difference in interest rates. The larger the difference, the possibility of earning may be higher.

The FCNR rate for NRI deposits has increased by 125 basis points (Libor+125 basis points) effective from November 23, 2011, thus encouraging NRIs to open deposits in India.

With domestic interest rates hardening even as fixed income returns fall globally , there is a sudden spurt in remittances from non-resident Indians (NRIs) seeking to arbitrage between local and international rates. Indians are borrowing overseas at low rates and are remitting funds in India for investments. As on June 30, total NRI deposits on various banks was pegged at $53 billion. With the rupee depreciating over 18% in the last six months, non-residents are getting more for the dollar than ever before

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