A senior Reserve Bank of India official has criticised foreign-exchange market makers for their role in aggravating the rupee’s weakness during the West Asia tensions, as the regulator keeps up its tough messaging stance in its defence of the currency.

Addressing an annual foreign exchange dealers’ conference in Paris at the weekend, RBI deputy governor T. Rabi Sankar said the arbitrage between local and offshore markets strained dollar liquidity at a time when the rupee was under pressure due to large foreign outflows, Bloomberg said, quoting people familiar with the matter.

Sankar's comments came two weeks after the RBI clamped down on speculation against the rupee by capping currency bets by banks at $100 million each and barring them from entering derivative contracts in the offshore market. The restrictions forced banks to reverse $30 billion worth of arbitrage trades under which they had bought dollars in the local market and sold them offshore.

In his speech, Sankar signalled the regulator’s displeasure at banks transferring arbitrage trades from their books to corporate clients, even though companies are not allowed to undertake such transactions, the people said. The RBI also disapproved of certain other ways in which banks took the trades off their books to reduce their exposure, the people cited Sankar as saying.

Last week, RBI governor Sanjay Malhotra said arbitrage positions had been building between offshore and local markets toward the end of March. While these linkages were important for efficient price discovery in normal times, excessive volatility and a rapid build-up of positions could be destabilizing, he said.

He added the currency market curbs aimed at quelling speculation against the rupee were temporary and would not remain in place forever.