Just when you think not a lot can happen in a 3-day market week (thanks to long weekends), Nifty hits all-time highs, and India becomes among the world’s first at implementing a system that could change how you buy and sell stocks!
In what is currently termed as the world’s fastest trading system, India became the 2nd country in the world (China is the 1st) to launch a T+0 settlement cycle.
While it was just tested out on Thursday with 25 stocks and is an optional method of settlement, this is an important milestone in the world and India’s stock market story.
The true implications of this system are yet to be seen as they test it out for the next few months, but understanding what it entails comes first!
What Does T+O Settlement Mean?
“Settlement” essentially indicates the process between pressing the buy button and receiving the shares or pressing the sell button and receiving your money
T+0 (where T stands for “transaction date”) means that the settlement happens within the day, i.e. you get your money or shares on the same day, as opposed to the previously prevalent system of T+1 in India (where it took 1 extra day to hit your account)
A longer settlement duration allows room for a possible default on these trades. Every market strives to reduce the settlement time, tending towards an instant settlement model
Why Is This Important?
From a painful T+14 model in the Harshad Mehta era (while developed markers were at T+5), India quickly adopted faster settlements to avoid such crises from happening, eventually outpacing everyone and now at the cusp of a historic moment
For retail and domestic investors, the T+0 system is a boost since they can sell shares, get their funds by the end of the day, and make a trade quickly the next day, while investors in T+1 and above markets will miss out on opportunities due to a delayed settlement
For foreign investors, T+0 isn’t as favourable just yet since they are forced to keep funds in their accounts 1 day in advance to facilitate the same-day settlements. This process is time-consuming and might expose them to currency fluctuations - making this not ideal for now
What Is Next?
Since the T+0 system is optional and restricted to a few stocks, it might be opted into by a select few, with foreign investors and a majority of domestic still choosing T+1 - meaning this won’t make much of a difference until it becomes mandatory
After a 6-month review and incrementally adding stocks to the testing, the regulators will iron out issues and exercise the mandate to over 500 stocks, which could result in volatility down the road due to the hurdles for foreign investors - but domestic investors will be in good spirits
T+0 is also another stepping stone as India competes with China and Singapore to see who cracks instant settlement first (you get your shares or money immediately). Owing to India’s UPI infrastructure, it seems like this battle is in favour of our nation
Bottom Line - We’re still very early on in the progress of the T+0 system application, and while issues will arise, it shouldn’t detrimentally impact the market too much, barring some volatility as people opt for either system. Either way, this move is great for India in the long-term