Banks asked to protect dollar deposits over fears of Cairn Energy seizing Indian offshore assets

India’s foreign exchange market is getting roiled after the government told state-run banks to protect their dollar deposits due to a tax dispute.

Banks were told by the authorities to protect their dollar deposits on concern that UK-based Cairn Energy Plc will move to seize India’s offshore assets after winning an arbitration ruling, according to people with knowledge of the matter.

The move has led to a sudden flood of dollars in India’s banking system, with the state banks staying away from receiving the greenback in the forwards market. As a result, the one-month forward premium on the currency pair jumped to as high as 10%, on an annualized basis, on Tuesday, double the average for the year.