The price on the exchange is free to be anything. What keeps it near fair value is that a participant can profit from the gap, and what stops the gap closing entirely is that profiting from it costs money.
Write the band directly. Let V be the live fair value of one unit's worth of basket, meaning what the underlying securities are worth right now rather than what they were worth when the fund last struck a net asset value. Let c_in be the participant's all-in cost of buying the basket and creating, expressed per unit, and c_out the all-in cost of buying units and redeeming. Then no participant will create unless the exchange price P satisfies P > V + c_in, and none will redeem unless P < V - c_out. Between those two levels there is no trade to do, and the price sits wherever supply and demand put it.
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What widens the ETF arbitrage band?
The band is therefore as wide as the costs are, and five things widen it.
An illiquid or expensive underlying raises c_in directly, because a basket of small-cap or emerging-market names costs more to assemble. A large-cap tracker quotes inside a basis point for that reason, and a frontier-market fund can quote 80 basis points wide.
A time-zone mismatch shuts the basket entirely: when the underlying market is closed during the fund's own trading hours, nobody can transact it until it reopens. The participant hedges with futures or an index swap, wears the basis risk overnight, and prices that risk into c_in. Every India-listed fund tracking a US or European index lives in this condition every day.
Stress and volatility raise costs exactly when the band is being tested. In a fast market the participant's own hedging turns expensive and uncertain, so the band widens at the moment a retail seller most wants it narrow.
Settlement friction leaves the participant financing a position overnight whenever the units and the basket settle on different cycles. That is a real charge and it enters c_in.
A creation halt matters most of the five and is discussed least. If the fund stops issuing units there is no creation to do at any price, so c_in becomes undefined rather than merely large. The upper bound on the band disappears and the premium is limited only by what buyers will pay.
What happens when creations are suspended?
Creations get suspended for ordinary reasons, such as a capacity limit on the underlying strategy, and for regulatory ones. Indian funds investing overseas hit exactly this in early 2022, when the industry-wide limit on overseas investment was reached and fund houses paused fresh subscriptions into overseas schemes on the Association of Mutual Funds in India's advice. Several India-listed overseas trackers then traded at large, persistent premiums for months. Verify the current status of that limit and any successor arrangement with the Securities and Exchange Board of India and the association before quoting today's position; the mechanism is permanent and the specific limit is not.