Bond yields decline as RBI seeks views on settlement via Euroclear platform

The potential settlement of domestic currency bonds through an offshore platform such as Euroclear has been a long-standing topic of discussion

Government bond yields on Thursday fell after reports that the Reserve Bank of India (RBI) is seeking views from market participants on the settlement of bonds via the Euroclear platform, as foreign portfolio investors viewed the development positively.

The yield on the benchmark 10-year bond fell by 3 basis points to settle at 7.18 per cent, against 7.21 per cent on Wednesday.

The RBI is in preliminary discussions with a limited group of participants in the bond market to gauge the potential ramifications of enabling the settlement of domestic sovereign bonds through the Euroclear platform.

The potential settlement of domestic currency bonds through an Euroclear-like offshore platform has been a long-standing topic of discussion. Such a development has the potential to streamline the inclusion of Indian bonds in global indices.

“Euroclear in itself is not significant. What is important is that it just makes it easier to access the Indian bond market, and it is a way to bond inclusion, that is what is important,” said Naveen Singh, head of trading & EVP at ICICI Securities Primary Dealership.

“And if bond inclusion happens, there will be a new set of buyers and demand for bonds will increase. The risk associated is that the discussion has been going on for years but it didn't materialise because of something or the other, and there are chances that it might not happen,” Singh said.

This initiative is widely regarded as a strategic step to broaden the international investor pool for domestic debt, with the ultimate goal of reducing borrowing expenses by incorporating these bonds into globally monitored indices.

“It will mean steady demand for Indian bonds because once it is included in the bond index, then the overseas funds will buy our bonds with steady demand. This will create additional demand for Indian government bonds and additional demand is always good for improving the prices and reducing the liquidity risk,” said Vijay Sharma, senior executive vice-president at PNB Gilts.

While it’s not a prerequisite to have Indian bonds listed on Euroclear for their inclusion in debt indices, index providers have strongly advocated for this step. However, this requirement has posed a hurdle to the inclusion of Indian bonds in global indices, primarily due to the need for specific tax accommodations when listing these securities on Euroclear.

India currently imposes taxes on gains from the sale of securities for both domestic and foreign entities. Euroclear, on the other hand, prefers a tax regime that does not include capital gains tax for offshore settlement of bonds. Consequently, the government in the past has encountered difficulties in devising a suitable tax framework for Indian bonds transacted on the international platform.