RBI Rejects Offshore Settlement for Sovereign Bonds, Prioritizing Domestic Liquidity on NDS-OM Platform

RBI Rejects Offshore Settlement for Sovereign Bonds, Prioritizing Domestic Liquidity on NDS-OM Platform​

Three sources familiar with the matter have revealed that the Reserve Bank of India (RBI) is not planning to enable direct offshore settlement of government securities through major international platforms like Euroclear. This decision comes despite recent significant tax reforms aimed at attracting a broader base of foreign investors into Indian sovereign bonds. The central bank maintains a preference for all related transactions to occur on its domestic Negotiated Dealing System-Order Matching (NDS-OM) platform, an electronic system designed for secondary market trading in government bonds.

RBI's Preference for Domestic Market Integration​

The sources indicated that the RBI wants overseas investors to participate directly within the NDS-OM platform. This reflects a strategic move to consolidate liquidity and ensure efficient domestic operations. India has steadily opened its bond markets to foreign capital over the past six years, culminating in recent scrapings of taxes on capital gains for foreign investors purchasing these securities.

Previously, the RBI had explored allowing offshore settlement to expand participation in local currency debt when overseas interest was lower. However, those discussions stalled due to constraints like capital gains and withholding taxes imposed on the securities at that time. Despite these tax barriers being removed, the central bank still favors settling through the local clearing corporation for benefits related to better price discovery and ease of buying and selling.

Concerns Over Fragmented Liquidity​

"Let all liquidity be on NDS-OM and let foreigners participate on NDS-OM," stated one source. The perspective is that allowing global clearing platforms would inevitably lead to a fragmentation of liquidity across the market. This view underscores the RBI's desire for unified trading activity within its domestic framework.

Meanwhile, several players are actively working to bridge the gap between international and domestic markets. Last year, MarketAxess launched an electronic trading platform specifically designed for foreign investors to trade Indian government securities directly. This system is integrated into the Clearing Corporation of India’s NDS-OM platform via a plug-in model, enabling unified trading for both foreign and domestic participants.

Global Recognition and Investment Trends​

Indian government bonds have recently gained international recognition, being included in major global indices such as the J.P. Morgan Emerging Market Bond Index and the Bloomberg Local Currency Emerging Market Bond Index. A committee from Bloomberg is slated to review India’s entry into a wider global bond index this month.

The commitment shown by overseas investors is evident. Since the Indian government removed taxes on foreign investment in these securities on June 5, Indian bonds have drawn $2 billion from overseas investors. This marks an increase compared to the $1.6 billion raised during the first five months of the year.

Expert Viewpoint on Market Necessity​

Adding weight to the importance of direct participation, Jayesh Mehta, vice chairman and chief executive officer at DSP Finance, commented on market dynamics. He noted that while Euroclear has become a habit for foreign debt investors, NDS-OM is fundamentally an order driven market. From a liquidity perspective, investing directly into the domestic platform remains the superior option.