RBI’s Stance on Offshore Settlement of Government Securities
India’s central bank has no plans to permit direct transactions of government securities via offshore payment systems like Euroclear, according to three sources with knowledge of the situation. This decision comes even after recent tax reforms aimed at luring foreign investors.
The Reserve Bank of India (RBI) is more inclined for foreign investors to engage directly with the National Negotiated Trading System-Order Matching (NDS-OM). This electronic platform facilitates trading in government securities within the secondary market.
Over the last six years, India has gradually opened its debt markets to foreign investors. This includes creating a pool of securities free from foreign investment restrictions and recently abolishing capital gains taxes for foreign entities dealing in these securities.
There was once consideration from the RBI regarding settlements through offshore platforms to widen the base of foreign investors in the local currency debt market, especially during times of low foreign interest. However, discussions never really took off back then, partly due to the existing capital gains tax and withholding tax on these securities.
Even with the tax now lifted, central banks continue to favor local clearinghouses for settlements. They cite advantages like better price discovery and enhanced ease of transactions.
As one source mentioned, “All liquidity will remain with NDS-OM, and we want to encourage foreign participation there. Introducing a global clearing platform could lead to fragmented liquidity.”
The sources prefer to remain anonymous as they are not permitted to talk to the media, and the Reserve Bank of India did not return requests for comment. A representative from Euroclear also refrained from discussing the matter.
In a related development, financial technology firm MarketAxess rolled out an electronic trading platform last year, enabling foreign investors to trade Indian government securities directly. This system will link with the Clearing Corporation of India’s NDS-OM, facilitating trading between foreign and domestic investors.
Bloomberg is also reportedly working on connecting its services to the NDS-OM platform, although their spokesperson did not comment on this.
Jayesh Mehta, vice chairman and CEO of DSP Finance, pointed out that “Euroclear has become commonplace for foreign bond investors. However, NDS-OM operates as an order-driven market, and direct investments are better from a liquidity standpoint.”
Recently, Indian government bonds have been incorporated into prominent global bond indexes, including the JPMorgan Emerging Markets Bond Index and the Bloomberg Local Currency Emerging Markets Bond Index. Notably, the Bloomberg Index Committee is set to evaluate India’s potential inclusion in broader global bond indexes this month.
