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 RBIs skittishness about opening up Indias 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, well 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 weeks 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 by FIIs.
Preventing a repeat of last years turmoil has been a priority for RBI governor Raghuram Rajan.
The former chief economist at the International Monetary Fund has said he fears the impact on India should the end of accommodative policies in developed economies spark an exodus from emerging markets, going as far as warning of a global market crash. But analysts said the government would be too cautious if it limits Euroclear settlements for only some investors.
Jan Dehn, head of research at Ashmore Investment Management in London, said the government should not paint all foreign investors with the same brush. This is good news, but they are still too cautious, in my view, said Dehn, whose firm manages $78 billion in emerging and frontier market assets. There are differences between institutional investors. They are not all hedge funds and short-term investors. There are many long-term institutional investors, whose introduction to the Indian market would be very healthy for many reasons.