The Indian custody market embraced last year’s switch to T+1 and, according to three of the nation’s leading custodians, there is cause for more optimism
On 27 January 2023, India’s equities market made the move to a T+1 trade settlement cycle. A year on, the markets are set to celebrate its one-year anniversary after an impressive year of growth and buoyancy in the face of global market turmoil.
With North America and potentially Europe to follow, the Indian custody markets have set the standard for the transition to shorter settlement cycles. Anuj Rathi, HSBC’s head of securities services for India, is keen to underline this fact.
“The Indian market moved ahead of others going into T+1. Now, the Indian markets are talking of T+0 settlements for retail in 2024 and instantaneous settlement coming into 2025,” Rathi says.
“Market participants have worked very well aligning the requirements of the regulators with the investors. It’s been more than 12 months that the markets have been on T+1 and been quite a smooth transition.”
The T+1 cycle means that all equities trades, be it exchange traded funds (ETFs) or shares, must be completed within one day. The move from the previous T+2 cycle aimed to increase efficiency in the market and settle trades faster.
Preparing for the major shift posed a challenge for the Indian custody market. Chaitanya Joshi, Standard Chartered’s head of securities services for India, explains his bank’s preparations: “We made necessary changes in our local settlement system well before the market went live, and also introduced a night desk to process client instructions that are received overnight.”
A growing market
Vivek Gupta, Axis Bank’s president and head of wholesale banking products for India, credits the strength of the Indian market for the seamless transition to T+1. He suggests that the markets have capitalised and successfully seized the advantage of China Plus One (C+1) policies, which discouraged investment in Chinese production in order to diversify markets and prevent an over-reliance on one nation — a chasm India has more than filled.
Gupta explains with gusto, “Positively, there has been a shift on a C+1 basis towards India. We are seeing [in action] what customers are telling us: that India is a leading investment destination. This is also the case in the capital markets. Whether it’s liberalisation on the bond front or interests from overseas investors into India, we see strength across the board.”
HSBC’s Rathi shares Gupta’s enthusiasm, explaining that the strength of the market will enable further growth. “A lot of positive developments have taken place. India has been included in the J.P. Morgan Global Bond Emerging Markets Index (GBI-EM), so that will be a big focus area for 2024.”
The induction into the GBI-EM will begin in June 2024 and is set to allow for several billion dollars of foreign investment into Indian government bonds. The admission has been long sought by both the Indian government and regulators as the Indian bond market expands to allow vast investment and boost an already buoyant market.
Strong and stable makes a trickle
The Indian government, headed by Prime Minister Narendra Modi, has been in power since 2014 and has vowed to make India the world’s third-largest economic power. It is widely expected that in this year’s general election, Modi will win a third term as Prime Minister.
Axis’ Gupta explains that the strength of the Indian markets can be attributed to the stability in the nation’s parliament. He says, “There’s a lot of promise. We’ve recently had domestic political elections that have gone favourably with the ruling party, so stability issues have been addressed. We have one of the few economies that is chugging along quite well.
“There is a genuinely strong belief that [India is a promising market], led by and centred around a strong, stable government with strong, stable policies. With many foreign direct investments coming in as the C+1 strategy plays out, clients I speak to have a strategic plan with an India aspect to it.”
Yet, while the Indian markets are growing, it has to be acknowledged that wealth inequality is also increasing across the country. A 2023 Oxfam report on inequality in India revealed that the richest one per cent in India own over 40 per cent of the entire nation’s wealth. The country also remains the nation with the highest number (228.9 million) of people living in poverty in the world — over double the next highest, Nigeria’s, 96.7 million. Oxfam says this inequality is only set to increase.
The previous year’s report on inequality in India from the charity was critical of the government’s economic policies, stating: “the stark wealth inequality in India is a result of an economic system rigged in favour of the super-rich over the poor and marginalised.”
Questioned whether such inequalities will affect the custodian market, Gupta rebutted the suggestion. He claims, with real emphasis, that “the country is in a good space and a lot of good work is being done. I think progressively. I’m very confident that that will lead to trickle-down benefits that will help the masses in multiple ways. I’m very confident [about India’s future].”
Questioned again on if there really are any merits of a trickle-down economic system, Gupta insists: “The amount of [infrastructural] work happening is heartening to see. All that work means there is a trickle-down effect to the supply chain, employment, et cetera. The leading indicators, from what I observe around the country and from clients, are full of optimism.”
Looking to the future: The mask is off
The Indian markets have had to shift to adjust to the implementation of T+1 and, with the market growing further and wider, custodians have to remain on top of
all developments.
HSBC’s Rathi reflects on the growth of custodial assets. He says: “We have seen significant growth in assets under custody, due to the market increasing in size and the market cap crossing US$4 trillion.”
The growth of the Indian markets is epitomised by the expansion of retail investment in the country, with an unprecedented 10 million depository accounts reportedly opened with the Indian Central Depository Services since April 2023.
“Retail investors have grown significantly,” Rathi says, “which helps indirectly as they will potentially be investing in domestic mutual funds and insurance. Retail investor growth contributes to the widening growth of the mutual fund and insurance industry. Foreign portfolio investors bought Indian equities, which includes both primary and secondary markets, worth US$21.23 billion in 2023 — a target segment for us.”
But, with markets expanding, how will HSBC adapt?
“Technology investment becomes the key for all custodian banks.” Ruthi explains plainly. “There is a big focus on application programming interfaces (APIs), flexible micro services-based tech architecture and a progressive move to batch-less systems to ensure that the connectivity between the offshore clients and the custodians in India improves significantly.”
Similarly, Standard Chartered are also looking to invest in technological advancements. Joshi explains: “We will explore use cases for robotics and automation to reduce manual processes, increase efficiency and assurance, and provide more efficient solutions to our clients in both custody and fund accounting.”
For all three custodians, the shift to T+1 dominated our discussions on regulation in the industry. All three participants agreed that the transition had been successful, and credited the regulator for the achievement.
Joshi suggests that there will be further regulatory pressure as regulators look to protect investors and the market. “This will result in additional requirements in line with those recently seen, including greater disclosure requirements and ownership verification. The regulators and the infrastructure will continue to push India to be a ground-breaking jurisdiction,” he says.
Axis’s Gupta echoes the sentiment and heaps praise on the regulator’s drive.
He says: “One thing I’d like to point out is the intent of the regulator to make sure that India is in-line with best-in-class practices globally. T+1, and potentially T+0, are very visible manifestations of a very strong intent from the regulator.”
Closing in on T+0?
The successful transition to T+1 across the Indian markets has given hope that the same feat can be repeated with T+0. However, making yet another transition to settle trade cycles on the same day will be difficult.
Joshi reveals the way in which Standard Chartered would deal with another shortening trade cycle.
He says: “To meet T+0 settlement timelines, we would need to make further changes to our operating model and local settlement system.
“While we enhanced the equity trade matching process through internal automation to make it near real-time, we would look to further enhance internal automations and explore API use cases for a T+0 settlement scenario.”
HSBC’s Rathi dismisses the notion that adapting to a shortened cycle would pose any difficulty. He retorts: “There are regulatory aspects which one has to keep abreast of, and we must work closely with policymakers and investors to ensure that the transition is in the best interest for both parties.”
Rathi argues that his bank would be more than capable of adapting and rules out any uncertainties that it would pose too much of a change, too quickly.
“The regulators in India will allow for a consultative process and adequate time to ensure all views are well understood before rolling out any changes.” Rathi ends with a final flourish. “Infrastructure changes are not really a chall
