Fixing T+1's teething problems for foreign portfolio investors

The Indian stock market may provide foreign portfolio investors (FPIs) more time to pay in a shortened trade settlement cycle so that they can overcome the end-of-day liquidity squeeze while booking foreign exchange. The flexibility being considered for FPIs to pay shortly after the market opens on settlement day, which is being moved up from two days to one after trade, is an attempt at retaining the benefits of a shorter trading cycle without lowering ease of transaction.

A T+1 cycle lowers default risk from the T+2 schedule and improves market liquidity through a quicker turnaround of trading capital. It is superior on paper, but involves daunting efficiency improvements in the market-clearing mechanism, which could be the reason no other stock exchange of scale, apart from China, has adopted it. The US intends to do so and India last month embarked on a phased rollout.

The regulator Sebi is trying to balance the interests of retail participation, whose share in trading is climbing, with institutional players that face operational hurdles in rejigging their backend systems to the new cycle. The via media being worked out involves foreshortening the clearance mechanism for retail traders, while allowing foreign institutions some leeway because of time zones.

Exchanges, clearing corporations, brokers and banks will get adequate time to upgrade their tech infrastructure because the switch is gradual, beginning with stocks institutions barely deal with. On its part, RBI may have to address concerns over synchronising liquidity in the forex market with the new trading cycle. The fundamental improvement in guaranteeing trades outweighs the pain of upgrading systems and processes to work in shorter settlement cycles.