The RBI is approached by global banks that handle FPI trading

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As the Indian stock market prepares to switch to a shorter settlement cycle from February end, large multinational banks handling funds from offshore investors told the Reserve Bank of India (RBI) last week to either act as the “dollar buyer of last resort” or eased the exposure rule for banks.

To achieve faster trade settlement, these banks, as custodians of foreign portfolio investors (FPIs), would have to convert foreign currency remitted by FPIs into Indian rupees in the evenings, when bank dealing rooms and corporate treasuries are empty, and the money and forex markets become illiquid. In such a circumstance, custodian banks would have no alternative but to place dollars with their headquarters (which they would be unable to convert in the market) – a transaction that might violate large-exposure rules.

In an ideal scenario, banks would like RBI to step in and use a specific facility to receive money from them during the nighttime hours.

 If the regulator is unwilling to do so, dollar funds used to settle equities should be excluded from the extensive exposure framework, “ET was told by a source in the industry. This was communicated to RBI on January 11 by six international banks – JP Morgan Chase, Citi, Deutsche Bank, Standard Chartered, BNP Paribas, and HSBC – who are custodians for 75-80 per cent of foreign portfolio investments into the country.

Currently, trades on Indian stock exchanges are resolved within two days of their occurrence – a process known as T+2 (an abbreviation for trade plus two days). Sebi, the capital market regulator, has stated that the settlement cycle will be accelerated by one day (to T+1) starting February 25. A stock buyer would receive stocks in a demat account, and a stock seller would receive monies in a bank account just one day after a trade was completed with this method.

Trades are finalised on T+1 under the current T+2 settlement, giving FPIs and custodians adequate time to deal in the foreign currency market and convert the dollar on T+1 – the next business day when the market is liquid. In a shorter T+1 cycle, however, the trade must be confirmed, and funds must be secured by the evening of the same day (i.e. T) the trade occurs. For this, the FPI must either pre-arrange funds, resulting in India becoming a pre-funded market with excess funds in FPI accounts.

“Because a pre-funded market would increase FPIs’ costs, they would choose to book FX in the evening of T or the early hours of T+1.” Currently, stock exchange clearing corporations require trade confirmation by 7:30 p.m. (T day), which may be delayed by a few hours. If it must be completed the same evening, the custodian bank must arrange for another bank to obtain rupees.

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