RBI Unlikely To Allow Offshore Settlement Of Government Bonds

Even after recent tax concessions aimed at attracting overseas investors, the Reserve Bank of India (RBI) is not keen on allowing direct settlement of government securities through offshore platforms such as Euroclear, according to people familiar with the matter.

Instead, the central bank wants foreign investors to participate through India's domestic bond trading infrastructure, particularly the Negotiated Dealing System-Order Matching (NDS-OM) platform, which is used for secondary-market trading of government bonds.

The stance suggests that while India remains open to foreign capital, it does not want trading activity shifting away from local markets.

RBI Wants Trading Activity To Stay Onshore

Over the past few years, India has gradually eased access to its bond market. The government created a category of securities with no foreign investment limits and recently removed capital gains and withholding taxes on eligible government bonds for overseas investors.

At one stage, policymakers explored the possibility of enabling settlements through international clearing platforms such as Euroclear to attract a wider pool of foreign investors.

However, those discussions did not progress, partly because foreign investors still faced tax-related hurdles at the time.

Now that those taxes have been removed, the RBI's position appears unchanged.

According to sources, the central bank believes keeping settlement activity within India's own clearing ecosystem will support better price discovery and prevent liquidity from being split across multiple venues.

One person familiar with the discussions said allowing global settlement platforms could fragment trading activity, whereas concentrating transactions on NDS-OM would help maintain liquidity in a single market.

Global Investors Already Have Access

India's domestic bond market has become increasingly accessible to foreign investors without requiring offshore settlement systems.

Last year, financial technology company MarketAxess launched a trading platform that allows overseas investors to directly trade Indian government securities. The platform is connected to NDS-OM through a plug-in model, enabling foreign and domestic investors to trade in the same market.

Bloomberg is also reportedly working on a similar connection to the NDS-OM platform.

Market participants say this model offers international investors direct access to Indian bonds while ensuring trading activity remains within the domestic ecosystem.

Jayesh Mehta, Vice Chairman and CEO of DSP Finance, noted that although many global debt investors are accustomed to using Euroclear, an order-driven market like NDS-OM may offer better liquidity and execution advantages.

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Bond Market Reforms Gather Pace

India's bond market has received growing global recognition in recent years.

Indian government securities have already secured inclusion in major international benchmarks, including the J.P. Morgan Emerging Market Bond Index and the Bloomberg Local Currency Emerging Market Bond Index.

Attention is now focused on a possible entry into Bloomberg's broader Global Aggregate Bond Index, with the index committee expected to review India's case later this month.

Recent policy measures appear to be generating interest from overseas investors. Market data shows foreign investors have brought nearly $2 billion into Indian government securities since the government removed taxes on eligible investments on 5 June. By comparison, total inflows during the first five months of the year stood at around $1.6 billion.

While the latest tax changes have strengthened India's appeal among global investors, the RBI appears determined to keep settlement and liquidity anchored within the country's own bond market infrastructure.

Sources:

The Economic Times

Moneycontrol

Reuters