GIFT City’s New Forex Settlement System

Syllabus: GS3/Economy

Context

• Union Finance Minister Nirmala Sitharaman launched a Foreign Currency Settlement System (FCSS) at the International Financial Services Centre (IFSC) in Gujarat International Finance Tec-City (GIFT City).

About

• Aim: To reduce settlement time dramatically, enhance liquidity management, lower settlement risk, and improve operational efficiency.
• Need for the System: 
  • Currently, foreign currency transactions in GIFT IFSC are processed via correspondent banking routes. 
  • This means an initiating bank uses multiple Nostro account relationships (accounts held with foreign banks) and intermediaries to route funds. That chain of relay can lead to settlement lags of 36 to 48 hours.
• Under the new system, Indian banks operating in GIFT IFSC can directly clear and settle international trades in foreign currencies within India.
  • It reduces the need for Nostro accounts and multiple intermediaries used in the correspondent banking route.

Foreign Currency Settlement System (FCSS)

• A local settlement bank (selected via bidding) will serve as the settlement hub. 
  • Member IFSC Banking Units (IBUs) will open accounts with this settlement bank. 
  • Inter-bank foreign currency transactions will be settled directly via these accounts, bypassing the multi-leg Nostro chain.
• Initially, the system will support US dollar transactions, with scope to add other foreign currencies over time. 
• The system will operate under the regulatory framework of the Payment and Settlement Systems (PSS) Act, 2007, and is authorised by International Financial Services Centres Authority (IFSCA). 
• The software is being developed by Indian Financial Technology & Allied Services (IFTAS), a wholly-owned subsidiary of the Reserve Bank of India.

Significance

• Faster settlements: Earlier, settlements took 36–48 hours through the traditional correspondent banking system, involving foreign intermediaries.
• Real Time Transactions: Transactions in foreign currencies (like USD, Euro, Yen) can now be settled in real time or near real time within India.
• This places GIFT City among select global financial hubs such as Hong Kong, Tokyo, and Manila that have local infrastructure for foreign currency settlement.

GIFT City

• GIFT City is India’s first special economic zone, which is designed to host institutions dealing in global finance, insurance, fintech, and capital markets.
• The project was first conceived in 2007 and was established in 2015.
• The idea was to create a city-within-a-city where companies could transact in foreign currencies, follow global regulations, and attract international players.
• The IFSCA, which was set up in 2020, regulates all activities inside the GIFT City, very similar to how Sebi, RBI, IRDAI, and PFRDA operate for their respective sectors.

Need for the GIFT City

• Before GIFT City, many Indian companies raised funds or managed offshore investments through hubs such as Singapore or Mauritius, largely because of friendlier tax and regulatory frameworks there. 
  • India was losing potential revenue and global financial influence as a result.
  • The idea behind GIFT City was to bring those offshore activities back onshore by offering a similar ecosystem within India, but with international standards of ease and flexibility.

Achievements of GIFT City so far

• As of mid-2025, it hosts nearly 1,000 registered entities, a mix of Indian and foreign banks, insurance firms, asset management companies, and capital market intermediaries.
• GIFT City is also home to India’s first aircraft and ship leasing units, following the government’s push to develop the leasing and financing ecosystem domestically. 
• Several global players, including aircraft lessors, fund managers, and fintech startups, have set up operations there.

Source: BS