RBI considering new clearing house at GIFT City

RBI considering new clearing house at GIFT City

Informist, Wednesday, Feb 21, 2024

--Mkt sources: RBI mulling domestic clearing house at GIFT City

--Mkt sources: Proposed IFSC clearing house initially for rupee NDF

--Sources: IFSC clearing house may eventually also settle gilt trades

By Pratiksha and Aaryan Khanna

NEW DELHI - The Reserve Bank of India is toying with the idea of setting up a domestic clearing house at the International Financial Services Centre in Gandhinagar-based Gujarat International Finance Tec-City, or GIFT City, according to bank treasury officials aware of the development.

The clearing house will likely begin with trades in rupee non-deliverable forwards, before widening its ambit to other sections of markets including government bonds, they said.

Over the past month, the RBI has been in discussions with leading banks, all of whom have signalled more comfort in dealing with a domestic entity, according to the officials. Currently, onshore trade in rupee NDF markets is cleared either bilaterally between banks, or in tie-ups with foreign banks who are members of offshore clearing houses. Currently, the preferred conduit is London Clearing House.

"There is a proposal for settlement of NDF trades in GIFT city through a domestic clearing house," one of the officials said. "Ultimately, we may see a domestic clearing house in GIFT city for all trades."

In April last year, the Reserve Bank of India had proposed allowing banks in International Financial Services Centre to offer non-deliverable foreign exchange derivatives contracts to resident users in the onshore market. The addition of a domestic clearing house is likely to develop the onshore NDF market, which has not seen much traction after such trades began in June 2023, the officials said. Currently, a branch of a non-bank custodian is permitted to become a clearing member of a clearing corporation in IFSC.

In addition, a domestic clearing house may also pave the way for trading in government securities in the international centre, the officials said. 

In the domestic market, Clearing Corporation of India Ltd provides guaranteed clearing and settlement for money, gilts, foreign exchange and derivative markets. It also provides non-guaranteed settlement for rupee interest rate derivatives and cross-currency transactions.

A subsidiary of this entity would fit perfectly well at GIFT City, as domestic participants already have an interface with the clearing house, the officials said. At present, while GIFT City houses two stock exchanges, one commodity bourse, and a bullion exchange.

"Banks have had a discussion with the RBI on this, and our sense was that everyone wants to use a domestic clearing house even at IFSC," another official said. "All markets, everything, should be covered by this once it gets going." An email seeking comments from the RBI did not receive a response. 

In an interview with Informist earlier this month, Department of Economic Affairs Secretary Ajay Seth had said the government was looking to set up a mechanism to enable trading of Indian gilts, green bonds specifically, at GIFT City. "There are efforts as to how green sovereign bonds could be traded there (GIFT City), but still some work needs to be done. I understand the RBI (Reserve Bank of India) is having discussions in that regard," Seth had said.

A domestic clearing house could well be a step in this direction. For the RBI, it would offer greater access and visibility on the NDF market activity, dealers said. The central bank often intervenes in the NDF market to influence spot dollar/rupee levels. 

The presence of a domestic clearing house may eventually aid foreign investor participation in the Indian bond market now that the country is set to be included in global bond indices operated by JP Morgan and Bloomberg later this year.

These are likely to lead to inflows of around $35 bln in India's debt markets in 2024-25 (Apr-Mar). Since JP Morgan assented to India's inclusion, foreign portfolio investors have bought $9.00 bln worth of debt in Sep 22-Feb 15, according to data from the National Securities Depository Ltd.

GIFT City is a financial special economic zone set up by the government to boost foreign investments in Indian assets. Operations of entities present in GIFT city, including the international business units of domestic banks, are not subject to Indian regulatory requirements and they get tax concessions on investments in trading of assets in the zone.

The government charges capital gains tax at the rate of 9% in GIFT City. Outside of the IFSC, the dividend income of foreign portfolio investors is taxed at the treaty rate with the country where the investor is based, or 20%, that is India's withholding tax rate, whichever is lower.  End

US$1 = 82.91 rupees

Edited by Ranjana Chauhan

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