MSCI underscores India's transition to a shorter settlement cycle 'with no issues'

MSCI conducts quarterly reviews and semi-annual rebalancing for each index within its universe.

Index provider MSCI (Morgan Stanley Capital International) has emphasized on the transition to a shorter securities settlement cycle (T+1) in its latest report and underscored how India did it 'with no issues'.

"Initially, market participants raised concerns that this change may result in the need to pre-fund trades in order to reduce the settlement risk. But after operational amendments from the SEBI, international institutional investors reported a transition to a shorter cycle, with no issues," MSCI said.

In January 2023, Indian stock exchanges shifted to a shorter and faster ‘trade-plus-one’ (T+1) settlement cycle, marking a significant milestone in capital markets. Prior to that, India was following the T+2 rolling settlement principle

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The T+1 settlement rule simply means that all trade-related settlements must be finished within a day or 24 hours. For example, if you are an investor and bought 50 shares on Monday, these should reflect in your Demat account on Tuesday.

"The transition to a shorter settlement cycle (T+1) brings numerous benefits such as enhanced investor protection, risk reduction in the financial system, and increased operational and capital efficiency while heightening resiliency in the securities market," said MSCI.

Earlier this year, the US and Canada have also announced that the transition to T+1 will take place in May 2024. MSCI believes EU, UK and Japan should also follow suit as alignment across developed markets would be beneficial during global index rebalances, to reduce frictions and prevent overdrafts, particularly considering current high interest rates.

MSCI conducts quarterly reviews and semi-annual rebalancing for each index within its universe. When the index rebalances, exchange traded funds (ETFs) that track those indices are required to adjust their portfolios. This results in flow of foreign capital into and out of countries due to these passive adjustments.