The Reserve Bank of India’s attempt to flush out excess dollars from the local market has offered a unique arbitrage opportunity for some banks. Lenders are using a regulatory loophole to make a sizable profit, according to people with knowledge of the matter. A large bank could easily rack up exposures of more than $1 billion using this strategy, multiple traders said, asking not to be identified as the deals aren’t public. Top beneficiaries from these trades are foreign banks, which have large and easy access to dollar stockpiles. At the center of the strategy is the RBI’s decision in February to remove limits on local bank exposures to other countries and central banks. Governor Shaktikanta Das had been hoping that banks would use their excess dollars to buy U.S. Treasuries, for instance, rather than offload them in the local market where price dislocations were making it costlier for Indian companies to hedge.