RBI Not in Favour of Offshore Bond Settlement, Sources Say; Prefers Domestic NDS-OM

India’s central bank is not looking to enable direct settlement of government securities via offshore settlement platforms like Euroclear -- one of the world's largest securities settlement systems -- despite recent tax changes aimed at attracting foreign investors, three sources familiar with the matter said.

The Reserve Bank of India (RBI) wants overseas investors to participate directly on the domestic Negotiated Dealing System-Order Matching (NDS-OM) platform, an electronic system for secondary market trading in government bonds, the sources said.

India has gradually opened up its bond markets to foreign investors over the last six years, by creating a pool of securities with no foreign investment limits and more recently by scrapping taxes on capital gains for overseas investors in these securities.

The RBI had previously explored allowing settlement through offshore platforms to expand the foreign investor base for local currency debt, at a time when overseas interest was subdued. However, the discussions didn't take off at that time due to the capital gains tax and withholding tax imposed on these securities.

Despite taxes now being scrapped, the central bank still prefers settlement via the local clearing corporation, due to better price discovery and ease of buying and selling.

“Let all liquidity be on NDS-OM and let foreigners participate on NDS-OM. If we allow global clearing platforms, it will fragment liquidity,” one of the sources said.

The sources declined to be identified as they are not authorised to speak to the media.

The Reserve Bank of India did not respond to a request for comment. A spokesperson for Euroclear declined to comment.

Last year, financial technology firm MarketAxess launched an electronic trading platform allowing foreign investors to directly trade Indian government securities. The system is linked to the Clearing Corporation of India’s NDS-OM platform through a plug-in model, enabling foreign and domestic investors to trade together.

Alongside MarketAxess, Bloomberg is also in the process of linking to the NDS-OM platform, sources said.

A Bloomberg spokesperson declined to comment.

"Euroclear has become a habit for foreign debt investors. NDS-OM is an order driven market. From a liquidity perspective, investing directly is a better option," said Jayesh Mehta, vice chairman & chief executive officer, DSP Finance.

Indian government bonds have in recent years been included in global bond indices such as the J.P. Morgan Emerging Market Bond Index and the Bloomberg Local Currency Emerging Market Bond Index. A Bloomberg index committee is due to review India's entry into a wider global bond index this month.

Since India's decision to remove taxes on foreign investment in government securities on June 5, Indian bonds have drawn $2 billion from overseas investors, compared with $1.6 billion in the first five months of the year.

($1 = 94.5400 Indian rupees)

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