USD/INR monthly futures expiry fuels demand for dollars -traders

, who had build positions in OTC and in futures to take advantage of arbitrage opportunities, were offering a premium to buy dollars at the .

The futures leg of the contract expires automatically at the reference rate, but the OTC leg needs to closed by buying or selling dollars.

The premium that traders were willing to pay to buy dollars at the Reserve Bank of India reference rate, rose to as much as 0.04 rupees, compared to almost par or 0.01 in recent weeks, a trader at a private sector bank said.

This means that if the RBI reference rate was fixed at 81.88 on Wednesday, the actual transaction price will be 81.92.

"There is demand from foreign banks for buying (dollars) at the fixing rate, probably related to offshore (clients)," the trader said.

"The squaring of futures-OTC arbitrage position is one more reason for the demand."

The open interest on the contract was at around $2.2 billion, down about $150 million from the previous session.

Meanwhile, the Indian rupee dropped to a record low of 81.9350, down from 81.58 in the previous session.

The RBI likely sold dollars via state-run banks to slow the pace of rupee's fall, traders said.