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The Indian rupee is poised to rally at the open on Monday amid arbitrage unwinding prompted by the central bank's curbs on onshore position limits.

 The Reserve Bank of India late Friday directed banks to cap their net open rupee positions in the foreign exchange market at $100 million by the end of each business day, with compliance required latest by April 10.

The RBI's curbs on onshore position limits are expected to lead to dollar selling by banks in the domestic foreign exchange market amid unwinding of existing arbitrage positions.

These arbitrage trades were built by buying dollars onshore and selling them in the NDF market to exploit the spread between the two segments. 

This spread had widened significantly amid a pickup in volatility and the fall in rupee on heightened risk aversion and oil-driven pressures linked to the Iran war. 

The size of such positions is estimated at $25 billion to over $50 billion.

The pressure on the rupee has been intense amid persistent portfolio outflows and mounting concerns over the impact of higher oil prices on India's economic outlook.

The rupee has dropped more than 4% in March through Friday, putting it on course for its worst monthly performance in more than seven years. 

The currency on Friday dropped nearly 1% to 94.8125, hitting an all-time low of 94.8400.

The RBI had been intervening in both the onshore and NDF markets to support the currency and slow the pace of the rupee's decline. 

"Expect opening quotes to be all over the place—very wide spreads, very choppy price action," a currency trader at a small private sector bank said.

"Any initial dip (in dollar/rupee) should see importer bids come in pretty quickly, while banks keep cutting positions. Hard to call where this settles."

The bid-offer spread on the interbank order system was extremely wide, quoted at 92.00/93.00.

The trader added that banks are likely to incur significant losses since they unwind positions at much wider spreads than where they were initiated.