India is considering joining Euroclear, the world’s largest securities settlement system, but with the condition that only long-term foreign investors trade government debt for now, three sources in know of the discussions said.
The proposal from the Reserve Bank of India (RBI), and submitted to the finance ministry, says it would be okay with allowing investors such as sovereign wealth funds to settle government bonds on the system, but not foreign institutional investors (FIIs). FIIs are the biggest foreign investors in teh country, and the RBI proposed that their exclusion from settling government debt on Euroclear be reviewed annually, one of the sources said.
Officials of the RBI, the finance ministry and the Securities and Exchange Board of India (Sebi) will discuss the proposal next Tuesday, two of the sources said.
The recommendation to exclude FIIs signals the RBI’s skittishness about opening up India’s debt market given concerns about sudden destabilising outflows, even as these foreign investors fund the current account deficit. “If right at the start we restrict it to only long-term players, probably the volatility will be much less in the market,” a source said. “Afterwards, we’ll see how the market reacts and then we may open it to others.”
The sources declined to be identified because the proposal is not public. Details are yet to be worked out and more consultations are likely to be needed after next week’s meeting, a finance ministry source said. Foreign investors have been calling for India to join Euroclear to make it easier for them to access domestic debt. It does this by removing some of the registration barriers because the financial services company that books the trade, usually a bank, settles and guarantees the trade.
In August last year, intense selling of stocks and bonds by overseas funds had sent the rupee to a record low and ushered in the worst market turmoil since the 1991 balance-of-payments crisis.
The discussions on Euroclear stopped ahead of the general election in March. In the Union Budget, finance minister Arun Jaitley announced last month that the government would be going ahead with listing Indian debt on Euroclear.
Under the proposal, long-term investors would be allowed to settle bonds via Euroclear as long as the debt they purchase does not exceed the $5-billion (R30,600 crore) limit imposed on them. Only 46.5% of the $5 billion quota for long-term investors had been filled as of Wednesday, compared with 83% utilised