On Friday, January 27, 2023, the final batch of securities in the Indian stock markets completed the transition to the T+1 settlement cycle. With this final phase completed, NSE and BSE mark the successful implementation of the phased transfer that had begun on February 25, 2022.
Why is this important and what does it mean for stock investors, going forward?
Let’s find out!
What is the T+1 settlement cycle in India
Very simply put, if you execute a trade in the stock market on a particular day, it will be settled and the trade will reflect in your demat account by the next day. If T is the trading day, then T+1 is the settlement day.
Before this, the Indian stock markets followed a T+2 settlement cycle, and before that, it was a weekly settlement cycle. As technology has advanced and our capital markets have become efficient, we have been able to reduce the settlement cycle more and more.
The transfer of securities to the new settlement cycle was done in a phased manner to prevent any disruptions in normal trading patterns. In the first lot, those shares with the least amount of market capitalisation were shifted. In the last phase, on the 27th of January, the companies with the largest market capitalisation made the transfer.
Just to put it in perspective for you, India is the only country, apart from China, that has completed this shift to the T+1 settlement cycle. Even the US stock markets still function on a T+2 settlement cycle.
This is a huge milestone for the Indian stock markets and will have a significant impact going forward.
Why is this important?
What are the benefits of the T+1 settlement cycle
If the amount of time it takes to complete one trade is smaller, then you can execute more trades in the same amount of time. This multiplies your probability of earning a profit. It also makes the entire process of investments and the mobilisation of funds in the Indian stock markets faster.
How?
Let me explain.
Imagine you have an amount of Rs 1 lakh in your trading account. This is the base capital and this is used again and again to generate money.
Now, if you had access to unlimited capital, the time window on each trade would probably not matter to know. But for most of us, efficient utilisation of scarce resources is something that we live by. We have to make the most of what we have.
This means, if you’re on a T+2 settlement cycle, your money will be blocked for at least 2 days. Only after you have received the shares can you look for selling opportunities.
But if you’re on a T+1 settlement cycle, this time is halved instantly! Everything will become twice as fast. You can square off existing trades and take new trades twice as many times. You can also earn twice the profit.
This can be hugely beneficial for investors in the Indian stock markets!
The road ahead
The road ahead is bright, to say the least. There will be higher liquidity, faster mobilisation of funds, and more participation from both retail and institutional investors.
