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RBI Resists Offshore Sovereign Bond Settlements, Citing Liquidity Concerns
The Reserve Bank of India (RBI) is not enabling direct offshore settlement for sovereign bonds, preferring domestic clearing for price discovery and avoiding liquidity fragmentation.
RBI Prioritizes Domestic Clearing for Sovereign Bonds
The Reserve Bank of India (RBI) has opted against facilitating direct offshore settlement of government securities through platforms like Euroclear, one of the world's largest securities settlement systems. This decision comes despite recent tax reforms aimed at drawing foreign capital, according to three sources familiar with the matter. The RBI's preference is for overseas investors to participate directly in the Negotiated Dealing System-Order Matching (NDS-OM) platform, an electronic system for secondary market trading in government bonds.
Previously, the RBI considered allowing offshore settlement to expand the foreign investor base for local currency debt, particularly when overseas interest was subdued. However, those discussions did not advance, partly due to capital gains tax and withholding tax imposed on these securities. Even with the removal of these taxes, the central bank maintains its preference for domestic clearing, citing improved price discovery and enhanced ease of buying and selling within the domestic framework. The RBI believes that permitting global clearing platforms would fragment liquidity, sources stated. Last year, MarketAxess launched an electronic trading platform enabling foreign investors to directly trade Indian government securities, and Bloomberg is also in the process of linking to the NDS-OM platform.
Liquidity Infusion Through VRR Auctions
On Wednesday, the RBI infused USD 864.7 million in transient liquidity into the banking system through two variable rate repo (VRR) auctions. This action followed a narrowing of surplus liquidity due to advance tax payments. The central bank injected USD 590.9 million through a two-day VRR auction at a cut-off rate of 5.26%, and an additional USD 264.4 million via a second two-day VRR auction.
Currently, banking system liquidity is estimated to be in surplus by USD 2.76 billion as of June 16, a decrease from the USD 1.76 billion surplus on June 15. The weighted average call money rates traded at 5.37% on Wednesday, 0.12% higher than the repo rate. MarketAxess and Bloomberg are in the process of integrating with the NDS-OM platform. Jayesh Mehta, vice chairman and chief executive officer of DSP Finance, noted that "Euroclear has become a habit for foreign debt investors." He further stated that from a liquidity perspective, "investing directly is a better option."
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