India has taken an important step towards integrating its government bond market more closely with global capital markets. Foreign portfolio investors have been exempted from income tax on both interest income and capital gains arising from investments in government securities, with the exemption applying to income arising on or after April 1, 2026. The reform materially improves the post-tax attractiveness of Indian government securities for overseas investors.
It could also strengthen India’s case for inclusion in the Bloomberg Global Aggregate Index. Bloomberg deferred inclusion in January, noting that operational and market-infrastructure issues required further evaluation, and indicated that it would provide an update in mid-2026.
But index inclusion should not be the endpoint of India’s bond-market reforms. The next objective should be to establish a carefully designed settlement link with Euroclear.
Indian government securities are traded primarily through the Negotiated Dealing System–Order Matching platform, or NDS-OM. Trades executed or reported on NDS-OM are sent to the Clearing Corporation of India, which becomes the central counterparty and guarantees settlement. The securities and funds legs are ultimately settled through accounts maintained with the Reserve Bank of India under a delivery-versus-payment mechanism. It is a robust domestic system that provides transparency, centralised clearing and effective regulatory oversight.
The onboarding process for foreign investors has also been simplified considerably. A Common Application Form now integrates FPI registration, PAN-related requirements, KYC and the opening of bank and dematerialised securities accounts. Nevertheless, an international institution seeking to invest in Indian government securities must still navigate India-specific registration, custody, account-opening, documentation and post-trade arrangements.
Large global investors can undertake this process, and many already do. But for asset managers, pension funds, insurers, central banks and reserve managers that invest across dozens of markets, unfamiliar operational requirements can affect whether a market receives a strategic allocation or remains a specialist exposure.
Tax reform has removed one major obstacle. Settlement access is now the next constraint that deserves attention.
What Euroclearability Would Mean
Euroclearability is sometimes incorrectly presented as shifting the Indian bond market offshore. It need not do so.
It would mean allowing eligible Indian government securities to be held and settled through a link connecting Euroclear Bank with India’s domestic market infrastructure. International investors could use familiar global custody and post-trade arrangements while continuing to invest in rupee-denominated securities issued under India’s domestic framework.
Euroclearability concerns how securities are held and settled; it does not necessarily determine where they must be traded or where prices are formed. A settlement link can therefore be designed without replacing NDS-OM, weakening domestic regulation or transferring control over the government bond market to an offshore venue.
Other markets have followed this approach. In 2024, for example, Korean Treasury Bonds and Monetary Stabilisation Bonds became settleable through a link between Euroclear Bank and the Korea Securities Depository. The instruments remained part of South Korea’s domestic market while international investors obtained a more familiar post-trade route.
Economic Gains
The most immediate benefit of Euroclearability would be a larger addressable investor base. Easier settlement would not create demand by itself, but it would remove a recurring operational barrier for institutions that already allocate capital internationally.
Broader participation could support greater trading volumes, improved secondary-market liquidity and more diverse demand at primary auctions. Greater secondary-market liquidity can, in turn, improve price discovery and help issuers raise funds more efficiently.
A 2019 cross-country study by PwC, published in cooperation with Euroclear, found that Euroclearability was associated with an average reduction of 28 basis points in sovereign borrowing costs in primary bond issues. It also estimated an average reduction of 14 basis points in corporate borrowing costs and found evidence of greater sovereign-bond liquidity and lower yield volatility.
These estimates should not be treated as a guaranteed outcome for India. They are cross-country averages rather than an India-specific forecast, and borrowing costs are also determined by inflation, fiscal policy, currency expectations, global interest rates and domestic liquidity conditions.
Nevertheless, even a modest and durable reduction in borrowing costs would be economically significant given the scale of central and state government financing. A deeper sovereign market would also strengthen the benchmark yield curve used to price corporate debt, potentially transmitting some of the benefits to infrastructure companies and other long-term borrowers.
For an economy with substantial requirements for transport, energy, urban infrastructure and other productive assets, widening access to long-term capital should be a strategic objective.
Fragmentation is Manageable
The strongest argument against Euroclearability is that it could fragment liquidity.
Reuters recently reported, citing three sources familiar with the matter, that the RBI presently prefers foreign investors to participate directly through NDS-OM and the domestic clearing system. The concern is that an international settlement route could create a parallel pool of activity, reducing liquidity on the domestic platform and weakening price discovery. The RBI did not publicly comment on that report.
In a market where trading is concentrated in a limited number of benchmark securities, dividing activity between separate and insufficiently connected pools could reduce visible market depth. A poorly designed arrangement could also complicate transaction reporting, regulatory surveillance, settlement-failure management and the monitoring of foreign investor positions.
But these are arguments for designing the link carefully, not for indefinitely retaining the status quo.
The policy objective should be to make Euroclear an additional access and settlement layer, rather than a separate price-formation venue. International access can be widened while execution, reporting and price discovery remain connected to the domestic market.
India has already applied this principle on the trading side.
MarketAxess has introduced an international-facing electronic interface connected to NDS-OM through a plug-in model, allowing foreign and domestic investors to interact within the same underlying market. A similar principle, global usability combined with domestic liquidity and oversight, should guide the settlement architecture.
India Model
India should not move immediately to unrestricted Euroclear settlement across central government securities, State Development Loans and corporate bonds. It should begin with a controlled pilot covering a limited set of liquid, benchmark central government securities that are already fully accessible to foreign investors.
The model should contain several safeguards.
NDS-OM and approved linked interfaces should remain central to execution and price discovery. Transactions should feed into a unified and timely reporting framework so that the market sees one consolidated picture of prices and volumes. Securities held through international and domestic channels should remain fully fungible, allowing positions to move between them rather than becoming trapped in separate liquidity pools.
Settlement cycles, corporate-action processes and procedures for handling settlement failures should be aligned. The RBI and CCIL should retain complete and timely visibility over transactions, investor positions and capital flows. The pilot should also include predefined measures of domestic turnover, bid-offer spreads, foreign participation and settlement efficiency, followed by a formal review before expansion.
Only after the framework has demonstrated that it adds investors without weakening domestic liquidity should it be extended to additional government securities, State Development Loans or suitable corporate debt instruments.
There is no single international template that India must copy. South Korea has established a Euroclear link, while other large index-eligible markets, including China and Indonesia, have continued without adopting the same offshore settlement route. India should select the model that best protects its domestic market while reducing avoidable barriers for global investors.
Beyond Index Inclusion
Bloomberg index inclusion could generate substantial benchmark-driven allocations to Indian government bonds. But index inclusion and Euroclearability solve different problems.
Index inclusion changes the benchmark demand for Indian securities. Euroclearability changes the recurring operational cost and ease of entering, holding, financing, and settling those securities.
Neither reform can guarantee permanent foreign inflows.
Overseas demand will continue to depend on Indian yields, currency expectations, fiscal credibility and global financial conditions. But a modern settlement link would ensure that investors assessing India do so on the basis of economic and market considerations—not because avoidable operational frictions make participation difficult.
The appropriate next step is therefore not an immediate migration of the settlement offshore. The Ministry of Finance and the RBI should initiate formal consultations with CCIL, SEBI, domestic custodians, international investors, and Euroclear on a phased, interoperable settlement model.
India has now lowered the tax barrier to international participation. It should move from debating whether its government bonds should become Euroclearable to determining how Euroclearability can be introduced without compromising domestic price discovery and regulatory oversight.
Bloomberg inclusion would be an important milestone. A well-designed Euroclear link would be a lasting market infrastructure.
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