India is exploring ways to settle its sovereign bonds domestically if they are included in global bond indices and traded overseas, a senior government official said. Local settlement will prevent the G-Sec market from shifting overseas, which could hurt the development of the Indian bond market. If settlement takes place in India, there won’t be any need for changes in taxation as well. The government is yet to take a call on the tax status of transactions settled overseas.
“Discussions are on (on the inclusion) with them… We are looking at (whether) the settlement can be facilitated here,” the official said.
Media reports earlier this week said that JP Morgan had sought investors’ views on whether to include India’s sovereign bonds in its GBI-EM Global Diversified Bond Index. Such a move is expected to bring a large pool of liquidity into the country’s sovereign bond market and fetch foreign capital, helping India fund its current account deficit.
Wary After the Nifty Experience
The country’s current account deficit is expected to widen to a decadal high of over $300 billion in the current fiscal.
Indian government and regulatory officials have been in touch with Euroclear, a global settlement platform, since 2013 on the changes needed in local regulations to facilitate the inclusion of Indian bonds in overseas indices. There was a renewed push for the inclusion of sovereign bonds in global indices from 2019, but concerns about offering capital gains tax exemption to investors have held back progress.
India has discussed the taxation issue at the OECD.
Typically, trades in bonds included in global indices such as the JP Morgan index are settled on platforms such as Euroclear. However, India has been pushing for settling trades onshore to avoid export of Indian market volumes, wary after the experience with the Nifty overseas derivatives trade. Until 2018, India’s benchmark index Nifty could be traded in Singapore through derivatives. This offshore trading and settlement led to the export of significant volumes to Singapore as foreign funds preferred the tax-friendly jurisdiction to route their trades. At its peak, SGX had a higher trade volume in Nifty derivatives than the National Stock Exchange.
“Some of the large foreign funds who currently trade directly in Indian debt markets are likely to shift their trading to the index if India is included in the JP Morgan bond index,” said the custodian of a leading MNC bank. “In such a case, if the trades are settled outside India, there could be export of volumes and also reduced liquidity for domestic investors.”
The official said the Securities and Exchange Board of India (Sebi) was also looking at ways to draw foreign capital.