India’s Central Bank Said to Oppose Overseas Settlement of Debt

India’s central bank is opposed to a proposal to allow overseas settlement of the nation’s sovereign debt because such a move could lead to higher currency volatility, people familiar with the matter said.

The Reserve Bank of India doesn’t favor the settlement of rupee bonds on Euroclear Bank SA or Clearstream Banking SA platforms, but wants foreigners to engage local custodians or depositories instead, the people said, asking not to be named as they aren’t authorized to speak to the media.

The government on its part wants to make rupee debt eligible for such platforms as India relies on foreign investment to help fund its current-account deficit.

Settlement abroad will help provide global investors direct access to buying and selling the notes, sidestepping brokers and their fees. RBI Governor Raghuram Rajan had in October indicated that policy makers are in talks with institutions like Euroclear to see that actual trades happen in India while investors can work through a front elsewhere.

“Euroclear and Clearstream have made some suggestions on different models for settling government rupee bonds held by non-residents in their system,” RBI spokeswoman Alpana Killawala said in an e-mailed response to questions Wednesday. “The proposals are under discussions with them and the government. No final view has yet been taken.”

Global funds have poured $6.9 billion into Indian corporate and government bonds in 2015 after boosting holdings by a record $26 billion last year. They have already exhausted their sovereign-debt quota of $30 billion, a cap put in place to prevent hot money from destabilizing the market.

Company-debt holdings are at about 78 percent of the permissible $51 billion limit, data from the National Securities Depository Ltd. show.

Capital Flows

Policy makers have resisted calls to allow fresh investment in government bonds as they seek to avoid a repeat of August 2013, when concern over Federal Reserve withdrawing monetary stimulus triggered capital outflows and sent the rupee tumbling to a record low of 68.845 a dollar.

The currency has since rebounded more than 10 percent as Governor Rajan took steps to boost the supply of dollars, including a concessional currency-swap facility for banks. India’s foreign-exchange reserves climbed to an unprecedented $343 billion as of April 3.

Three-month implied volatility in the rupee, used to price options, has dropped to 6.7 percent from as high as 21 percent in August 2013, data compiled by Bloomberg show.

India’s government is considering to initially restrict proposed overseas settlement of bonds to long-term investors such as sovereign wealth and pension funds, finance ministry officials with direct knowledge of the matter, said in July.

D.S. Malik, a Finance Ministry spokesman, wasn’t immediately available for a comment.

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