MUMBAI, April 14 -- The Reserve Bank of India (RBI) is scrutinising the methods large banks used to unwind their rupee arbitrage positions, six people familiar with the developments said, on concerns the trades may have breached regulations and impeded efforts to stabilise the currency. In late March and early April, the RBI effectively forced nL4N40F171 banks to unwind up to $40 billion in rupee arbitrage trades nL4N40K1C5 between the onshore and non-deliverable forward markets as it sought to shore up a currency nL1N40K0ZX that was teetering at record lows due to the Iran war and foreign fund outflows. Following the central bank's measures, the rupee has recovered from near 95.20 per US dollar to near 92.50, before paring its rally on Monday. The central bank, in a rare such scrutiny of forex trades, is now looking into whether banks offloaded the arbitrage trades to corporates and related parties, three of the people said. It has queried treasury officials across at least five large banks, reviewed details of their interactions with clients and sought details on transactions with related parties, they said. Such unwinding of the trades hampered the objective of bringing dollars to the market to ease the downward pressure on the currency. The RBI did not immediately respond to an email seeking comment. The people declined to be identified since they are not authorised to speak to the media. Reuters could not determine the list of banks whose transactions are being scrutinised. It was not clear what penalties they could face if any violations were found. T. Rabi Sankar, the central bank's deputy governor, spoke about banks shifting arbitrage trades to corporate clients, at an event organised by the Indian Foreign Exchange Dealers' Association in Paris over the weekend, according to two bankers who attended the event. Banks facilitated arbitrage trades by corporate clients despite knowing that corporates are only supposed to hedge their foreign exchange exposure, two of the people, who are both familiar with the central bank's thinking on the matter, said. Such transactions are not aligned with the spirit of the central bank measures and the regulator's scrutiny is meant to signal close monitoring of market behaviour, the first of the two people said....