RBI Rejects Offshore Settlement for Sovereign Bonds to Protect Liquidity

The Reserve Bank of India (RBI) has decided against enabling direct settlement of government securities via offshore platforms like Euroclear, despite recent fiscal reforms. Instead, the central bank intends to mandate that overseas investors trade directly through India's domestic Negotiated Dealing System-Order Matching (NDS-OM) platform.

Prioritising Domestic Liquidity over Global Platforms

While India has aggressively opened its bond markets to foreign capital—most notably by scrapping capital gains taxes for overseas investors on June 5—the RBI remains cautious about how these trades are settled. The central bank's primary concern is the potential fragmentation of market liquidity.

By requiring foreign investors to use the NDS-OM platform, the RBI aims to consolidate all trading activity into a single pool. Industry experts suggest that allowing global clearing platforms to handle settlements could split the market, making it harder to maintain deep liquidity. "Let all liquidity be on NDS-OM and let foreigners participate on NDS-OM. If we allow global clearing platforms, it will fragment liquidity," a source familiar with the matter stated.

The Shift from Tax Barriers to Structural Integration

In previous years, discussions regarding offshore settlement were hindered by high capital gains and withholding taxes. With those tax barriers now removed, the focus has shifted from fiscal incentives to market structure. The RBI’s current stance emphasizes better price discovery and seamless buying and selling through the local clearing corporation.

The domestic NDS-OM platform is an electronic system designed for secondary market trading in government bonds. While Euroclear is a global standard for many debt investors, the RBI believes that direct participation in the order-driven domestic market offers superior liquidity advantages. Jayesh Mehta, Vice Chairman & CEO of DSP Finance, noted that from a liquidity perspective, investing directly via the domestic system is a better option for market stability.

Technological Integration and Global Index Inclusion

The move toward direct domestic trading is being supported by evolving fintech solutions. Last year, MarketAxess launched an electronic trading platform that uses a plug-in model to link foreign investors directly to the Clearing Corporation of India’s NDS-OM platform. Bloomberg is also reportedly in the process of establishing a similar link to the NDS-OM system.

This structural push comes at a critical time for Indian debt markets. Following India's inclusion in the J.P. Morgan Emerging Market Bond Index and the Bloomberg Local Currency Emerging Market Bond Index, foreign interest has surged. Since the removal of taxes in June, Indian bonds have attracted $2 billion from overseas investors, a significant jump from the $1.6 billion seen in the first five months of the year.

Key Takeaways