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Adviser and AdministratorMorgan Stanley Investment Management Inc.522 Fifth AvenueNew York, New York 10036

CustodianState Street Bank and Trust CompanyOne Lincoln StreetBoston, Massachusetts 02111

Stockholder Servicing AgentComputershare Trust Company, N.A.211 Quality Circle, Suite 210College Station, Texas 77845

Legal CounselDechert LLP1095 Avenue of the AmericasNew York, New York 10036

Counsel to the Independent DirectorsPerkins Coie LLP30 Rockefeller PlazaNew York, New York 10112

Independent Registered Public Accounting FirmErnst & Young LLP200 Clarendon StreetBoston, Massachusetts 02116

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.

CEEDDSAN1808444

EXP 6.30.18

DirectorsFrank L. Bowman

Kathleen A. Dennis

Nancy C. Everett

Jakki L. Haussler

Dr. Manuel H. Johnson

Joseph J. Kearns

Michael F. Klein

Patricia Maleski

Michael E. Nugent,Chair of the Board

W. Allen Reed

Fergus Reid

OfficersJohn H. GernonPresident and PrincipalExecutive Officer

Timothy J. KnierimChief Compliance Officer

Francis J. SmithTreasurer and PrincipalFinancial Officer

Mary E. MullinSecretary

Michael KeyVice President

I N V E S T M E N T M A N A G E M E N T

Morgan StanleyInvestment Management Inc.Adviser

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.NYSE: EDDSemi-Annual ReportApril 30, 2017

e-DELIVERY: Go PaperlessIt’s faster, easier and greener.Sign up today at:www.icsdelivery.comMay not be available for all accounts.

For additional Fund information, including the Fund’s net asset value pershare and information regarding the investments comprising the Fund’sportfolio, please call toll free 1 (800) 231-2608 or visit our website atwww.morganstanley.com/im. All investments involve risks, including thepossible loss of principal.

© 2017 Morgan Stanley.

Merrill Corp - MS Emerging Markets Domestic Debt Fund_ Inc. Semi-Annual Report [Funds] 04-30-2017 ED [AUX] | cmashak | 21-Jun-17 00:08 | 17-13145-10.aa | Sequence: 1CHKSUM Content: 15639 Layout: 20955 Graphics: 38561 CLEAN

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April 30, 2017

Table of Contents

Letter to Stockholders ................................................................................................................................................................... 3

Portfolio of Investments ................................................................................................................................................................. 6

Statement of Assets and Liabilities.................................................................................................................................................. 12

Statement of Operations ................................................................................................................................................................ 13

Statements of Changes in Net Assets.............................................................................................................................................. 14

Statement of Cash Flows................................................................................................................................................................ 15

Financial Highlights ........................................................................................................................................................................ 16

Notes to Financial Statements ........................................................................................................................................................ 17

Portfolio Management .................................................................................................................................................................... 29

Investment Policy........................................................................................................................................................................... 30

Dividend Reinvestment Plan ............................................................................................................................................................ 35

Privacy Notice ............................................................................................................................................................................... 36

Merrill Corp - MS Emerging Markets Domestic Debt Fund_ Inc. Semi-Annual Report [Funds] 04-30-2017 ED [AUX] | cmashak | 27-May-17 00:06 | 17-13145-10.ba | Sequence: 1CHKSUM Content: 24286 Layout: 18698 Graphics: No Graphics CLEAN

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April 30, 2017

Letter to Stockholders (unaudited)

PerformanceFor the six months ended April 30, 2017, the Morgan Stanley Emerging Markets Domestic Debt Fund, Inc. (the “Fund”) had totalreturns of 2.88%, based on net asset value, and 5.04% based on market value per share (including reinvestment of distributions),compared to its benchmark, the J.P. Morgan Government Bond Index — Emerging Markets Global Diversified Index (the “Index”)*,which returned 2.04%. On April 30, 2017, the closing price of the Fund’s shares on the New York Stock Exchange was $7.90,representing a 10.0% discount to the Fund’s net asset value per share. Past performance is no guarantee of future results.

Factors Affecting Performance• Emerging markets (EM) fixed income assets overcame a fourth quarter 2016 pullback as the market adjusted to higher U.S.

Treasury yields, driven in part by a rate hike by the U.S. Federal Reserve (“Fed”). The U.S. presidential election victory of DonaldTrump stoked excitement about the potential for stimulative policies and resulting higher growth and inflation, which triggered arotation to equities from bonds, and from emerging to U.S. markets. However, EM fixed income assets rebounded in 2017 as therotation from debt to equities slowed and the new U.S. administration faced early challenges to its policy agenda. A tempering oftrade talk also reduced fears of a wholesale withdrawal from the North American Free Trade Agreement (NAFTA) by the U.S.,increasing the odds for a more pragmatic renegotiation of the trade treaty. The post-election outflows of $13 billion from EMfixed income were recouped in 2017 as investors added $32 billion to the asset class, compared to a total of $43 billion in 2016.i

Investors continued to increase exposure to the asset class due to a brightening outlook for EM fundamentals and a stable globalmacro backdrop offsetting the emergence of idiosyncratic developments in certain countries. After the post-election spike, U.S.Treasury yields and the U.S. dollar remained relatively contained in spite of the Fed’s decision to hike policy rates 25 basis points(bps).

• EM domestic debt outperformed other areas of EM fixed income over the period. Performance was driven primarily by localbond performance, which returned 3.06%, while EM currencies weakened by -0.99% versus the U.S. dollar, leading to a totalreturn of 2.04% for the market as measured by the Index.ii Commodity-exporting countries with high interest rates andattractive currency valuations such as Russia, Colombia, Brazil, and Indonesia performed well in the period, as did othercommodity-related countries such as South Africa and Peru. Lower-yielding Eastern European countries such as the CzechRepublic, Romania, Hungary, and Poland underperformed the broader market, as did Turkey, Malaysia, the Philippines, Mexico,Thailand, and Chile. Investments in Turkey particularly suffered as weakening institutional strength and concerns about fiscaland current account deficits weighed on valuations.

• Broadly, duration positioning contributed to relative performance, while currency positioning was detrimental to relativeperformance. The use of derivatives both contributed and detracted from performance during the period. The primaryinstruments used were bond futures (U.S. Treasury and German bund) and currency forwards. Bond futures were used to hedgeinterest rate exposure, and currency forwards were used to hedge or add to currency exposure.



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April 30, 2017

Letter to Stockholders (unaudited) (cont’d)

• Duration positioning in Brazil, Colombia, Russia, South Africa, India, Thailand, and Egypt contributed to relative performancein the period, as did currency positioning in Turkey, Russia, China, and India. Conversely, duration positions in Poland,Romania, and the Philippines detracted from relative performance, as did currency positions in Poland, Indonesia, South Korea,and Singapore. Interest rate hedges in the U.S. and Germany, as well as euro and Asian currency hedges nominally detracted fromrelative performance, despite allowing the portfolio to add exposure to other beneficial areas of the market.

Management Strategies• Looking forward, we remain of the view that developed market (DM) yields will continue to support the “right” carry

opportunities, a strategy of borrowing at a low interest rate and investing in a higher return asset, and that the improving macro-economic backdrop will be an ongoing “push” factor of inflows into higher yielding assets, including EM fixed income. Forglobal growth, the benefit of higher U.S. growth is likely to be offset partly by the extent of a potentially more protectionist U.S.trade agenda. However, the net effect will not be known for a while, with Mexico and China remaining in focus. What seems tobe a little clearer, despite the tension, is that cooperation between the new U.S. president and the more traditional trade-friendlywing of the Republican Party will likely temper the protectionist agenda. Consequently, NAFTA repudiation fears have declinedas renegotiation seems more likely. The EM/DM growth differential has stabilized and appears to be recovering in favor of EM asthe negative growth impacts from Brazil and Russia lessen. China’s growth slowdown is likely to continue in the medium term,with better-than-expected short-term growth likely to be shortly challenged by a tightening in financial conditions.

• Against this backdrop, there will be winners and losers in emerging markets. An overvalued U.S. dollar with downside potentialcombined with higher commodity prices should support commodity-exporting countries that still benefit from improvingfundamentals and a significantly undervalued exchange rate, while commodity-importing countries that run large currentaccount deficits are likely to underperform despite attractive carry cushions. Fairly closed economies enjoying limited currentaccount deficits, such as India, are likely to remain rather uncorrelated to global financial conditions. The Mexican peso willlikely remain the main shock absorber to negative U.S. trade protectionism. Gradual clarity on NAFTA has allowed the peso torecover from its weakest levels, but uncertainty remains.

• We think that steeper DM yield curves warrant the shortening of duration exposures with a focus on higher-yieldingcurrencies/countries that have attractive characteristics given the change in global growth and trade outlook post the U.S.elections. We remain optimistic about the prospects for EM fixed income spreads for 2017 as country fundamentals and themacro environment remain supportive, with those countries that rely most on global trade potentially challenged. The variousfactors both pushing and pulling investors into EM fixed income remain in place: developed market yields remain very low,economic data in the emerging markets appears to be recovering, Fed rate hikes are likely to remain gradual, U.S. protectionismfears have eased, and concerns of a sharp slowdown in China have diminished. We believe that EM assets could well absorb



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April 30, 2017

Letter to Stockholders (unaudited) (cont’d)

multiple Fed rate hikes in 2017 if driven by increasing U.S. growth and not inflation; however, assets remain vulnerable to spikesin U.S. policy uncertainty from Trump or Fed hawkishness, and European elections also pose potential downside risks.

Sincerely,

John H. GernonPresident and Principal Executive Officer May 2017

*J.P. Morgan Government Bond Index — Emerging Markets Global Diversified Index tracks local currency government bonds issued by emerging markets. It is

not possible to invest directly in an Index.

i Source: J.P. Morgan

ii Source: Bloomberg L.P.

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April 30, 2017

Portfolio of Investments (unaudited)(Showing Percentage of Total Value of Investments)

Hungary (4.7%)Sovereign (4.7%)

Hungary Government Bond,2.50%, 10/27/21 HUF 1,580,000 $ 5,7333.00%, 6/26/24 1,200,000 4,2235.50%, 6/24/25 5,610,920 22,9997.50%, 11/12/20 1,774,000 7,559

40,514India (2.8%)Sovereign (2.8%)

India Government Bond,8.40%, 7/28/24 INR 1,445,000 23,961

Indonesia (11.9%)Sovereign (11.9%)

Barclays Bank PLC, Indonesia Government Bonds, Credit Linked Notes,10.00%, 7/17/17 (a) IDR 290,000,000 22,002

Credit Suisse, Indonesia Government Bonds, Credit Linked Notes,10.00%, 7/17/17 154,683,530 11,736

Indonesia Treasury Bond,8.38%, 3/15/34 202,600,000 16,1578.75%, 5/15/31 412,855,000 34,2889.00%, 3/15/29 204,725,000 17,264

101,447Malaysia (5.0%)Sovereign (5.0%)

Malaysia Government Bond,3.96%, 9/15/25 MYR 23,754 5,4234.18%, 7/15/24 141,175 33,0334.23%, 6/30/31 19,500 4,390

42,846Mexico (12.2%)Sovereign (12.2%)

Mexican Bonos,6.50%, 6/10/21 MXN 763,185 39,7857.50%, 6/3/27 105,000 5,6898.00%, 12/7/23 129,000 7,1818.50%, 5/31/29 188,400 10,956

Petroleos Mexicanos, (Units)7.65%, 11/24/21 (a)(c) 791,300 40,088

103,699

FIXED INCOME SECURITIES (95.9%)Argentina (6.5%)Corporate Bonds (1.8%)

Tarjeta Naranja SA,22.44%, 4/11/22 (a)(b) $ 7,000 $ 7,210

YPF SA,23.08%, 7/7/20 (a)(b) 7,500 8,108

15,318Sovereign (4.7%)

Argentina Bonar Bonds,21.39%, 4/3/22 (b) ARS 181,500 12,471

Argentina Treasury Bond,2.25%, 4/28/20 206,300 15,039

City of Buenos Aires Argentina,22.63%, 3/29/24 (b) 189,500 12,413

39,923 55,241

Brazil (12.2%)Sovereign (12.2%)

Brazil Notas do Tesouro Nacional, Series F,10.00%, 1/1/21 - 1/1/23 BRL 330,581 104,399

Chile (0.2%)Sovereign (0.2%)

Chile Government International Bond,5.50%, 8/5/20 CLP 1,165,000 1,854

Colombia (6.5%)Corporate Bond (0.6%)

Fideicomiso PA Costera,6.25%, 1/15/34 (a) COP 13,958,175 4,833

Sovereign (5.9%)Colombia Government

International Bond,9.85%, 6/28/27 1,466,000 657

Colombian TES,6.00%, 4/28/28 26,000,000 8,5567.50%, 8/26/26 24,636,700 9,1567.75%, 9/18/30 16,848,100 6,39910.00%, 7/24/24 44,128,500 18,393

Financiera de Desarrollo Territorial SA Findeter,7.88%, 8/12/24 (a) 21,492,000 7,170

50,331 55,164

Face Amount Value (000) (000)


The accompanying notes are an integral part of the financial statements.

Merrill Corp - MS Emerging Markets Domestic Debt Fund_ Inc. Semi-Annual Report [Funds] 04-30-2017 ED [AUX] | cmashak | 26-May-17 21:29 | 17-13145-10.ca | Sequence: 1CHKSUM Content: 2899 Layout: 39633 Graphics: No Graphics CLEAN


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April 30, 2017

Portfolio of Investments (unaudited) (cont’d)(Showing Percentage of Total Value of Investments)

Turkey (8.6%)Corporate Bond (3.3%)

Turkiye Garanti Bankasi AS,7.38%, 3/7/18 (a) TRY 102,980 $ 27,928

Sovereign (5.3%)Turkey Government Bond,

7.10%, 3/8/23 38,300 9,2628.00%, 3/12/25 50,050 12,4849.20%, 9/22/21 22,000 5,90310.50%, 1/15/20 29,475 8,28210.60%, 2/11/26 31,000 8,959

44,890 72,818

TOTAL FIXED INCOME SECURITIES(Cost $904,622) 817,177

SHORT-TERM INVESTMENTS (4.1%)U.S. Treasury Security (1.0%)

U.S. Treasury Bill,0.64%, 7/27/17 (d)(e) (Cost $8,218) $ 8,230 8,214

Value Shares (000)

Investment Company (2.1%)Morgan Stanley Institutional

Liquidity Funds — Treasury Securities Portfolio —Institutional Class (See Note F) (Cost $17,540) 17,539,587 17,540


Egypt (1.0%)Sovereign (1.0%)

Egypt Treasury Bills,18.70%, 9/12/17 EGP 109,975 5,73119.00%, 12/5/17 66,225 3,316

Total Sovereign (Cost $9,124) 9,047TOTAL SHORT-TERM INVESTMENTS

(Cost $34,882) 34,801TOTAL INVESTMENTS (100.0%)

(Cost $939,504) (f)(g) 851,978LIABILITIES IN EXCESS OF OTHER ASSETS (262,294)NET ASSETS $ 589,684

Peru (2.7%)Sovereign (2.7%)

Peru Government Bond, (Units)5.70%, 8/12/24 (c) PEN 44,037 $ 13,902

Peruvian Government International Bond,(Units)5.70%, 8/12/24 (a)(c) 14,001 4,4208.20%, 8/12/26 (c) 13,154 4,811

23,133Poland (8.9%)Sovereign (8.9%)

Poland Government Bond,3.25%, 7/25/25 PLN 29,850 7,7095.25%, 10/25/20 93,088 26,2285.75%, 9/23/22 141,500 41,605

75,542Romania (0.3%)Sovereign (0.3%)

Romania Government Bond,4.75%, 2/24/25 RON 11,275 2,914

Russia (5.5%)Sovereign (5.5%)

Russian Federal Bond — OFZ,7.00%, 8/16/23 RUB 765,785 13,0617.60%, 7/20/22 438,000 7,7328.15%, 2/3/27 1,398,800 25,817

46,610South Africa (6.5%)Sovereign (6.5%)

South Africa Government Bond,6.75%, 3/31/21 ZAR 83,700 6,0697.25%, 1/15/20 24 27.75%, 2/28/23 54,000 3,9768.00%, 1/31/30 658,850 45,214

55,261Thailand (1.4%)Sovereign (1.4%)

Thailand Government Bond,3.63%, 6/16/23 THB 380,000 11,774






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April 30, 2017

Portfolio of Investments (unaudited) (cont’d)


(d) Rate shown is the yield to maturity at April 30, 2017.(e) All or a portion of the security was pledged to cover margin

requirements for a swap agreement.(f) Securities are available for collateral in connection with

open foreign currency forward exchange contracts, futurescontracts and a swap agreement.

(g) At April 30, 2017, the aggregate cost for federal incometax purposes approximates the aggregate cost for bookpurposes. The aggregate gross unrealized appreciation isapproximately $33,211,000 and the aggregate grossunrealized depreciation is approximately $120,737,000resulting in net unrealized depreciation of approximately$87,526,000.

OFZ Obilgatsyi Federal’novo Zaima (Russian Federal LoanObligation)

Country assignments and aggregations are based generally on thirdparty vendor classifications and information, and may be differentfrom the assignments and aggregations under the policies set forthin the Fund’s prospectus and/or statement of additional informationrelating to geographic classifications.

(a) 144A security — Certain conditions for public sale mayexist. Unless otherwise noted, these securities are deemedto be liquid.

(b) Variable/Floating Rate Security — Interest rate changes onthese instruments are based on changes in a designatedbase rate. The rates shown are those in effect on April 30,2017.

(c) Consists of one or more classes of securities tradedtogether as a unit.

Foreign Currency Forward Exchange Contracts:

The Fund had the following foreign currency forward exchange contracts open at April 30, 2017: Contracts In Unrealized to Exchange Appreciation Deliver For Delivery (Depreciation) Counterparty (000) (000) Date (000)JPMorgan Chase Bank NA BRL 37,700 $ 11,820 5/3/17 $ (58)JPMorgan Chase Bank NA BRL 107,538 $ 34,314 5/3/17 434JPMorgan Chase Bank NA BRL 84,238 $ 26,338 5/3/17 (202)JPMorgan Chase Bank NA BRL 37,000 $ 11,568 5/3/17 (89)JPMorgan Chase Bank NA BRL 12,000 $ 3,752 5/3/17 (29)JPMorgan Chase Bank NA BRL 12,000 $ 3,752 5/3/17 (29)JPMorgan Chase Bank NA $ 11,681 BRL 37,000 5/3/17 (24)JPMorgan Chase Bank NA $ 3,744 BRL 12,000 5/3/17 37JPMorgan Chase Bank NA $ 3,814 BRL 12,000 5/3/17 (33)JPMorgan Chase Bank NA $ 26,890 BRL 84,238 5/3/17 (350)JPMorgan Chase Bank NA $ 33,622 BRL 107,538 5/3/17 258JPMorgan Chase Bank NA $ 11,787 BRL 37,700 5/3/17 90JPMorgan Chase Bank NA KRW 6,700,000 $ 5,923 5/8/17 35JPMorgan Chase Bank NA KRW 10,695,000 $ 9,496 5/8/17 96JPMorgan Chase Bank NA MYR 38,700 $ 8,704 5/8/17 (208)JPMorgan Chase Bank NA PLN 26,362 $ 6,642 5/8/17 (153)JPMorgan Chase Bank NA $ 4,779 KRW 5,410,000 5/8/17 (25)JPMorgan Chase Bank NA $ 4,653 KRW 5,300,000 5/8/17 5JPMorgan Chase Bank NA $ 5,878 KRW 6,685,000 5/8/17 (3)JPMorgan Chase Bank NA $ 5,682 MYR 24,900 5/8/17 53JPMorgan Chase Bank NA $ 9,098 MYR 40,400 5/8/17 206JPMorgan Chase Bank NA THB 180,000 $ 5,187 5/11/17 (16)JPMorgan Chase Bank NA THB 408,000 $ 11,826 5/11/17 31JPMorgan Chase Bank NA $ 6,260 PEN 20,400 5/11/17 23JPMorgan Chase Bank NA $ 36,923 THB 1,275,600 5/11/17 (47)



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April 30, 2017



Foreign Currency Forward Exchange Contracts: (cont’d) Contracts In Unrealized to Exchange Appreciation Deliver For Delivery (Depreciation) Counterparty (000) (000) Date (000)JPMorgan Chase Bank NA IDR 371,738,000 $ 27,804 5/12/17 $ (59)JPMorgan Chase Bank NA $ 10,391 CLP 6,795,000 5/12/17 (214)JPMorgan Chase Bank NA $ 1,279 IDR 17,000,000 5/12/17 (5)JPMorgan Chase Bank NA RUB 72,554 $ 1,266 5/15/17 (5)JPMorgan Chase Bank NA COP 14,032,000 $ 4,931 5/19/17 174JPMorgan Chase Bank NA INR 1,019,974 $ 15,743 5/19/17 (75)JPMorgan Chase Bank NA CNY 65,000 $ 9,423 5/22/17 11JPMorgan Chase Bank NA MXN 586,203 $ 30,978 5/22/17 (61)JPMorgan Chase Bank NA TRY 21,000 $ 5,885 5/22/17 7JPMorgan Chase Bank NA TRY 40,602 $ 10,985 5/22/17 (381)JPMorgan Chase Bank NA $ 23,835 CZK 586,500 5/22/17 (14)JPMorgan Chase Bank NA $ 3,183 MXN 60,900 5/22/17 41JPMorgan Chase Bank NA $ 4,523 TRY 16,300 5/22/17 40JPMorgan Chase Bank NA PHP 179,000 $ 3,592 5/25/17 14JPMorgan Chase Bank NA HUF 3,400,000 $ 11,868 5/26/17 34JPMorgan Chase Bank NA HUF 2,238,400 $ 7,818 5/26/17 28JPMorgan Chase Bank NA RON 18,500 $ 4,446 5/26/17 5JPMorgan Chase Bank NA SGD 6,600 $ 4,729 5/26/17 4JPMorgan Chase Bank NA SGD 8,121 $ 5,832 5/26/17 18JPMorgan Chase Bank NA $ 6,005 HUF 1,715,000 5/26/17 (36)JPMorgan Chase Bank NA $ 4,341 RON 18,000 5/26/17 (19)JPMorgan Chase Bank NA $ 4,092 RON 17,000 5/26/17 (11)JPMorgan Chase Bank NA $ 10,627 RON 44,160 5/26/17 (25)JPMorgan Chase Bank NA ZAR 101,906 $ 7,771 5/26/17 176JPMorgan Chase Bank NA BRL 84,238 $ 26,679 6/2/17 337JPMorgan Chase Bank NA EUR 16,300 $ 17,831 6/2/17 50JPMorgan Chase Bank NA $ 1,094 EUR 1,000 6/2/17 (3)JPMorgan Chase Bank NA KRW 6,685,000 $ 5,880 6/5/17 3Citibank NA ARS 137,800 $ 7,520 6/13/17 (1,259)Citibank NA ARS 52,000 $ 2,921 6/13/17 (391)Citibank NA ARS 34,900 $ 2,053 6/13/17 (170)Citibank NA ARS 87,400 $ 5,141 6/13/17 (427)Citibank NA ARS 427,000 $ 24,540 6/13/17 (2,661)Citibank NA $ 3,850 ARS 61,300 6/13/17 54Citibank NA $ 12,441 ARS 212,000 6/13/17 1,064Citibank NA $ 6,254 ARS 108,000 6/13/17 626Citibank NA $ 8,771 ARS 152,000 6/13/17 912JPMorgan Chase Bank NA ARS 101,470 $ 6,416 6/13/17 (48)JPMorgan Chase Bank NA ARS 36,000 $ 2,277 6/13/17 (16)JPMorgan Chase Bank NA $ 5,009 ARS 80,000 6/13/17 87JPMorgan Chase Bank NA $ 13,022 ARS 207,309 6/13/17 184JPMorgan Chase Bank NA $ 1,247 ARS 19,835 6/13/17 16JPMorgan Chase Bank NA $ 3,722 ARS 60,000 6/13/17 100



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April 30, 2017



Foreign Currency Forward Exchange Contracts: (cont’d) Contracts In Unrealized to Exchange Appreciation Deliver For Delivery (Depreciation) Counterparty (000) (000) Date (000)Citibank NA EGP 60,000 $ 3,210 9/20/17 $ (28)Citibank NA EGP 100,500 $ 5,317 9/20/17 (106)

$(2,027)

Futures Contracts:

The Fund had the following futures contracts open at April 30, 2017: Unrealized Number Appreciation of Value Expiration (Depreciation) Contracts (000) Date (000)Short:German Euro BOBL 300 $(43,091) Jun-17 $ 9German Euro Bund 277 (48,815) Jun-17 (211)U.S. Treasury 10 yr. Note 703 (88,380) Jun-17 (712)

$(914)

Interest Rate Swap Agreement:

The Fund had the following interest rate swap agreement open at April 30, 2017: Notional Unrealized Floating Rate Pay/Receive Fixed Termination Amount AppreciationSwap Counterparty Index Floating Rate Rate Date (000) (000)Morgan Stanley & Co., LLC* 1 Month TIIE Pay 7.62% 2/7/22 MXN 146,000 $118

* Cleared swap agreement, the broker is Morgan Stanley & Co., LLC.

KRW — South Korean WonMXN — Mexican PesoMYR — Malaysian RinggitPEN — Peruvian Nuevo SolPHP — Philippine PesoPLN — Polish ZlotyRON — Romanian New LeuRUB — Russian RubleSGD — Singapore DollarTHB — Thai BahtTRY — Turkish LiraZAR — South African Rand

TIIE Interbank Equilibrium Interest Rate.ARS — Argentine PesoBRL — Brazilian RealCLP — Chilean PesoCNY — Chinese Yuan RenminbiCOP — Colombian PesoCZK — Czech KorunaEGP — Egyptian PoundEUR — EuroHUF — Hungarian ForintIDR — Indonesian RupiahINR — Indian Rupee



11


April 30, 2017



Portfolio Composition

Percentage ofClassification Total InvestmentsSovereign 91.2%Corporate Bonds 5.7Other** 3.1Total Investments 100.0%***

** Industries and/or investment types representing less than 5% of totalinvestments.

***Does not include open short futures contracts with an underlying faceamount of approximately $180,286,000 with net unrealized depreciationof approximately $914,000. Does not include open foreign currencyforward exchange contracts with net unrealized depreciation ofapproximately $2,027,000 and does not include an open swapagreement with unrealized appreciation of approximately $118,000.



12


April 30, 2017

Financial Statements April 30, 2017 (unaudited)

(000)

Assets:Investments in Securities of Unaffiliated Issuers, at Value (Cost $921,964) $ 834,438Investment in Security of Affiliated Issuer, at Value (Cost $17,540) 17,540

Total Investments in Securities, at Value (Cost $939,504) 851,978Foreign Currency, at Value (Cost $716) 688Cash 14Interest Receivable 19,345Receivable for Investments Sold 5,424Unrealized Appreciation on Foreign Currency Forward Exchange Contracts 5,253Receivable for Variation Margin on Futures Contracts 2,275Tax Reclaim Receivable 38Receivable for Variation Margin on Swap Agreements 19Receivable from Affiliate 5Other Assets 134

Total Assets 885,173

Liabilities:Payable for Line of Credit 274,888Payable for Investments Purchased 10,388Unrealized Depreciation on Foreign Currency Forward Exchange Contracts 7,280Due to Broker 1,010Deferred Capital Gain Country Tax 750Payable for Advisory Fees 702Payable for Custodian Fees 249Payable for Professional Fees 64Payable for Administration Fees 56Payable for Stockholder Servicing Agent Fees 2Other Liabilities 100

Total Liabilities 295,489

Net AssetsApplicable to 67,125,800 Issued and Outstanding $0.01 Par Value Shares (100,000,000 Shares Authorized) $ 589,684

Net Asset Value Per Share $ 8.78

Net Assets Consist of:Common Stock $ 671Paid-in-Capital 872,868Accumulated Net Investment Loss (64,983)Accumulated Net Realized Loss (128,243)Unrealized Appreciation (Depreciation) on:

Investments (Net of $580 of Deferred Capital Gain Country Tax) (88,106)Futures Contracts (914)Swap Agreements 118Foreign Currency Forward Exchange Contracts (2,027)Foreign Currency Translations 300

Net Assets $ 589,684

Statement of Assets and Liabilities


Merrill Corp - MS Emerging Markets Domestic Debt Fund_ Inc. Semi-Annual Report [Funds] 04-30-2017 ED [AUX] | pweakly | 02-Jun-17 17:16 | 17-13145-10.da | Sequence: 1CHKSUM Content: 45048 Layout: 61207 Graphics: No Graphics CLEAN


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April 30, 2017

Financial Statements (cont’d) Six Months Ended April 30, 2017 (unaudited)

(000)

Investment Income:Interest from Securities of Unaffiliated Issuers (Net of $352 of Foreign Taxes Withheld) $ 27,185Dividends from Security of Affiliated Issuer (Note f) 19

Total Investment Income 27,204

Expenses:Advisory Fees (Note B) 4,128Interest Expense on Line of Credit (Note G) 2,727Administration Fees (Note C) 330Custodian Fees (Note D) 239Professional Fees 64Stockholder Reporting Expenses 53Directors’ Fees and Expenses 8Stockholder Servicing Agent Fees 4Other Expenses 102

Expenses Before Non Operating Expenses 7,655

Bank Overdraft Expense 4

Total Expenses 7,659

Rebate from Morgan Stanley Affiliate (Note F) (9)

Net Expenses 7,650

Net Investment Income 19,554

Realized Gain (Loss):Investments Sold (Net of $169 of Capital Gain Country Tax) (47,829)Foreign Currency Forward Exchange Contracts (3,070)Foreign Currency Transactions (851)Futures Contracts 33Swap Agreement 12

Net Realized Loss (51,705)

Change in Unrealized Appreciation (Depreciation):Investments (Net of Increase in Deferred Capital Gain Country Tax of $556) 47,941Foreign Currency Forward Exchange Contracts (1,025)Foreign Currency Translations 467Futures Contracts (1,291)Swap Agreement 118

Net Change in Unrealized Appreciation (Depreciation) 46,210

Net Realized Loss and Change in Unrealized Appreciation (Depreciation) (5,495)

Net Increase in Net Assets Resulting from Operations $ 14,059

Statement of Operations




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April 30, 2017

Financial Statements (cont’d) Six Months Ended April 30, 2017 Year Ended (unaudited) October 31, 2016

(000) (000)

Increase (Decrease) in Net Assets:Operations:

Net Investment Income $ 19,554 $ 52,433Net Realized Loss (51,705) (190,674)Net Change in Unrealized Appreciation (Depreciation) 46,210 185,504

Net Increase in Net Assets Resulting from Operations 14,059 47,263

Distributions from and/or in Excess of:Net Investment Income (23,494) —Paid-in-Capital — (51,099)

Total Distributions (23,494) (51,099)

Capital Share Transactions:Repurchase of Shares (0 and 830,897 shares) — (6,032)

Net Decrease in Net Assets Resulting from Capital Share Transactions — (6,032)

Total Decrease (9,435) (9,868)

Net Assets:Beginning of Period 599,119 608,987

End of Period (Including Accumulated Net Investment Loss of $(64,983) and $(61,043)) $589,684 $ 599,119

Statements of Changes in Net Assets




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Financial Statements (cont’d) Six Months Ended April 30, 2017 (unaudited)

(000)

Cash Flows From Operating Activities:Proceeds from Sales and Maturities of Long-Term Investments $ 304,513Purchase of Long-Term Investments (264,469)Net (Increase) Decrease in Short-Term Investments (9,291)Net (Increase) Decrease in Foreign Currency Holdings 1,696Net Realized Gain (Loss) for Foreign Currency Transactions, Foreign Currency Forward Exchange Contracts,

Futures Contracts and a Swap Agreement (7,134)Net Investment Income 19,554Adjustments to Reconcile Net Investment Income to Net Cash Provided for (Used by) Operating Activities:

Net (Increase) Decrease in Interest Receivable (1,580)Net (Increase) Decrease in Receivables Related to Operations 279Net (Increase) Decrease in Advisory Fees Payable (59)Net (Increase) Decrease in Interest Payable 45Net (Increase) Decrease in Payables Related to Operations 1,964Accretion/Amortization of Discounts and Premiums (1,608)

Net Cash Provided for (Used by) Operating Activities 43,910

Cash Flows From Financing Activities:Cash Proceeds for Line of Credit (20,000)Cash Paid for Repurchase of Shares —Cash Distribution Paid (23,494)

Net Cash Provided for (Used by) Financing Activities (43,494)

Net Increase (Decrease) in Cash 416Cash at Beginning of Period (402)

Cash at End of Period $ 14

Supplemental Disclosure of Cash Flow Information:Interest Paid on Line of Credit during the Period $ 2,682

Statement of Cash Flows




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Financial HighlightsSelected Per Share Data and Ratios Six Months Ended April 30, 2017 Year Ended October 31, (unaudited) 2016(1) 2015 2014 2013 2012Net Asset Value, Beginning of Period $ 8.93 $ 8.96 $ 13.67 $ 16.45 $ 17.71 $ 17.34

Net Investment Income(2) 0.29 0.78 0.80 0.94 1.19 1.32Net Realized and Unrealized Gain (Loss) (0.09) (0.07) (4.64) (2.11) (1.48) 0.20

Total from Investment Operations 0.20 0.71 (3.84) (1.17) (0.29) 1.52

Distributions from and/or in excess of:Net Investment Income (0.35) — — (0.49) (1.00) (1.15)Net Realized Gain — — — (0.51) — —Return of Capital — (0.76) (0.91) (0.65) — —

Total Distributions (0.35) (0.76) (0.91) (1.65) (1.00) (1.15)

Anti-Dilutive Effect of Share Repurchase Program — 0.02 0.04 0.04 0.03 —

Net Asset Value, End of Period $ 8.78 $ 8.93 $ 8.96 $ 13.67 $ 16.45 $ 17.71

Per Share Market Value, End of Period $ 7.90 $ 7.87 $ 7.54 $ 11.96 $ 14.35 $ 16.47

TOTAL INVESTMENT RETURN:(3)Market Value 5.04%(6) 15.59% (30.35)% (5.52)% (7.21)% 11.38%

Net Asset Value 2.88%(6) 10.37% (27.58)% (5.80)% (1.08)% 9.61%

RATIOS, SUPPLEMENTAL DATA:

Net Assets, End of Period (Thousands) $589,684 $599,119 $608,987 $954,468 $1,172,019 $1,283,101

Ratio of Expenses to Average Net Assets 2.71%(4)(7) 2.60%(4) 2.44%(4) 2.20%(4) 2.10%(4) 2.16%(4)Ratio of Expenses to Average Net Assets

Excluding Interest Expense 1.74%(4)(7) 1.76%(4) 1.74%(4) 1.63%(4) 1.59%(4) 1.59%(4)Ratio of Net Investment Income to Average

Net Assets 6.93%(4)(7) 8.89%(4) 7.37%(4) 6.30%(4) 6.72%(4) 7.63%(4)Ratio of Rebate from Morgan Stanley Affiliates

to Average Net Assets 0.00%(5)(7) 0.00%(5) 0.00%(5) 0.00%(5) 0.00%(5) 0.00%(5)Portfolio Turnover Rate 34%(6) 80% 36% 107% 75% 64%

(1) Reflects prior period custodian out-of-pocket expenses that were reimbursed in September 2016. The amount of the reimbursement wasimmaterial on a per share basis and did not impact the total return of the Fund. The Ratio of Expenses to Average Net Assets would havebeen 0.01% higher and the Ratio of Net Investment Income to Average Net Assets would have been 0.01% lower had the custodian notreimbursed the Fund.

(2) Per share amount is based on average shares outstanding.(3) Total investment return based on net asset value per share reflects the effects of changes in net asset value on the performance of the

Fund during each period, and assumes dividends and distributions, if any, were reinvested. This percentage is not an indication of theperformance of a stockholder’s investment in the Fund based on market value due to differences between the market price of the stockand the net asset value per share of the Fund. Total returns are based upon the market value and net asset value on the last business dayof each period.

(4) The Ratios of Expenses and Net Investment Income reflect the rebate of certain Fund expenses in connection with the investments inMorgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate fromMorgan Stanley Affiliates to Average Net Assets.”

(5) Amount is less than 0.005%.(6) Not annualized.(7) Annualized.




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Notes to Financial Statements (unaudited)

The Morgan Stanley Emerging Markets Domestic Debt Fund,Inc. (the “Fund”) was incorporated in Maryland on January 25,2007 and is registered as a non-diversified, closed-endmanagement investment company under the InvestmentCompany Act of 1940, as amended (the “Act”). The Fundapplies investment company accounting and reporting guidance.The Fund’s primary investment objective is to seek a high levelof current income, with a secondary investment objective oflong-term capital appreciation. The Fund seeks to achieve itsinvestment objectives by investing, under normal circumstances,at least 80% of its managed assets in emerging markets domesticdebt. To the extent the Fund invests in derivative instrumentsthat Morgan Stanley Investment Management Inc. (the“Adviser”), believes have economic characteristics similar to suchsecurities, such investments will be counted for purposes ofmeeting the Fund’s investment objective. To the extent the Fundmakes such investments, the Fund will be subject to the risk ofsuch derivative instruments as described herein.

A. Significant Accounting Policies: The followingsignificant accounting policies are in conformity with UnitedStates (“U.S.”) generally accepted accounting principles(“GAAP”). Such policies are consistently followed by the Fundin the preparation of its financial statements. GAAP may requiremanagement to make estimates and assumptions that affect thereported amounts and disclosures in the financial statements.Actual results may differ from those estimates.

1. Security Valuation: (1) Bonds and other fixed incomesecurities may be valued according to the broadest andmost representative market. In addition, bonds and otherfixed income securities may be valued on the basis of pricesprovided by a pricing service/vendor. The pricingservice/vendor may employ a pricing model that takes intoaccount, among other things, bids, yield spreads, and/orother market data and specific security characteristics.Alternatively, if a valuation is not available from an outsidepricing service/vendor, and the security trades on an

exchange, the security may be valued at its latest reportedsale price (or at the exchange official closing price if suchexchange reports an official closing price), prior to the timewhen assets are valued. If there are no sales on a given dayand if there is no official exchange closing price for thatday, the security is valued at the mean between the lastreported bid and asked prices if such bid and asked pricesare available in the relevant exchanges; (2) when marketquotations are not readily available, includingcircumstances under which the Adviser determines that theclosing price, last sale price or the mean between the lastreported bid and asked prices are not reflective of asecurity’s market value, portfolio securities are valued attheir fair value as determined in good faith underprocedures established by and under the generalsupervision of the Fund’s Board of Directors (the“Directors”). Occasionally, developments affecting theclosing prices of securities and other assets may occurbetween the times at which valuations of such securities aredetermined (that is, close of the foreign market on whichthe securities trade) and the close of business of the NewYork Stock Exchange (“NYSE”). If developments occurduring such periods that are expected to materially affectthe value of such securities, such valuations may beadjusted to reflect the estimated fair value of such securitiesas of the close of the NYSE, as determined in good faith bythe Directors or by the Adviser using a pricing serviceand/or procedures approved by the Directors.(3) over-the-counter (“OTC”) swaps may be valued by anoutside pricing service approved by the Directors or quotesfrom a broker or dealer. Swaps cleared on a clearinghouseor exchange may be valued using the closing price providedby the clearinghouse or exchange; (4) futures are valued atthe settlement price on the exchange on which they tradeor, if a settlement price is unavailable, at the last sale priceon the exchange; (5) quotations of foreign portfoliosecurities, other assets and liabilities and forward contracts

Merrill Corp - MS Emerging Markets Domestic Debt Fund_ Inc. Semi-Annual Report [Funds] 04-30-2017 ED [AUX] | cmashak | 21-Jun-17 00:08 | 17-13145-10.ea | Sequence: 1CHKSUM Content: 19407 Layout: 44735 Graphics: No Graphics CLEAN


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Notes to Financial Statements (unaudited) (cont’d)

stated in foreign currency are translated into U.S. dollarequivalents at the prevailing market rates prior to the closeof the NYSE; and (6) investments in mutual funds,including the Morgan Stanley Institutional LiquidityFunds, are valued at the net asset value (“NAV”) as of theclose of each business day.

The Directors have responsibility for determining in goodfaith the fair value of the investments, and the Directorsmay appoint others, such as the Fund’s Adviser or avaluation committee, to assist the Directors in determiningfair value and to make the actual calculations pursuant tothe fair valuation methodologies previously approved bythe Directors. Under procedures approved by the Directors,the Fund’s Adviser has formed a Valuation Committeewhose members are approved by the Directors. TheValuation Committee provides administration andoversight of the Fund’s valuation policies and procedures,which are reviewed at least annually by the Directors.These procedures allow the Fund to utilize independentpricing services, quotations from securities and financialinstrument dealers, and other market sources to determinefair value.

The Fund has procedures to determine the fair value ofsecurities and other financial instruments for which marketprices are not readily available. Under these procedures, theValuation Committee convenes on a regular and ad hocbasis to review such securities and considers a number offactors, including valuation methodologies and significantunobservable valuation inputs, when arriving at fair value.The Valuation Committee may employ a market-basedapproach which may use related or comparable assets orliabilities, recent transactions, market multiples, bookvalues, and other relevant information for the investmentto determine the fair value of the investment. Anincome-based valuation approach may also be used inwhich the anticipated future cash flows of the investment

are discounted to calculate fair value. Discounts may alsobe applied due to the nature or duration of any restrictionson the disposition of the investments. Due to the inherentuncertainty of valuations of such investments, the fairvalues may differ significantly from the values that wouldhave been used had an active market existed. The ValuationCommittee employs various methods for calibrating thesevaluation approaches including a regular review ofvaluation methodologies, key inputs and assumptions,transactional back-testing or disposition analysis, andreviews of any related market activity.

2. Fair Value Measurement: Financial AccountingStandards Board (“FASB”) Accounting StandardsCodificationTM (“ASC”) 820, “Fair Value Measurement”(“ASC 820”), defines fair value as the value that the Fundwould receive to sell an investment or pay to transfer aliability in a timely transaction with an independent buyerin the principal market, or in the absence of a principalmarket, the most advantageous market for the investmentor liability. ASC 820 establishes a three-tier hierarchy todistinguish between (1) inputs that reflect the assumptionsmarket participants would use in valuing an asset orliability developed based on market data obtained fromsources independent of the reporting entity (observableinputs) and (2) inputs that reflect the reporting entity’sown assumptions about the assumptions marketparticipants would use in valuing an asset or liabilitydeveloped based on the best information available in thecircumstances (unobservable inputs) and to establishclassification of fair value measurements for disclosurepurposes. Various inputs are used in determining the valueof the Fund’s investments. The inputs are summarized inthe three broad levels listed below.

• Level 1 – unadjusted quoted prices in active markets foridentical investments



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April 30, 2017


• Level 2 – other significant observable inputs (includingquoted prices for similar investments, interest rates,prepayment speeds, credit risk, etc.)

• Level 3 – significant unobservable inputs including theFund’s own assumptions in determining the fair value ofinvestments. Factors considered in making thisdetermination may include, but are not limited to,information obtained by contacting the issuer, analysts,or the appropriate stock exchange (for exchange-tradedsecurities), analysis of the issuer’s financial statements orother available documents and, if necessary, availableinformation concerning other securities in similarcircumstances

The inputs or methodology used for valuing securities arenot necessarily an indication of the risk associated withinvesting in those securities and the determination of thesignificance of a particular input to the fair valuemeasurement in its entirety requires judgment andconsiders factors specific to each security.

The following is a summary of the inputs used to value theFund’s investments as of April 30, 2017.

Level 2 Level 1 Other Level 3 Unadjusted significant Significant quoted observable unobservable Investment prices inputs inputs TotalType (000) (000) (000) (000)Assets:

Fixed Income SecuritiesCorporate

Bonds $ — $ 48,079 $— $ 48,079

Sovereign — 769,098 — 769,098Total Fixed

Income Securities — 817,177 — 817,177

Level 2 Level 1 Other Level 3 Unadjusted significant Significant quoted observable unobservable Investment prices inputs inputs TotalType (000) (000) (000) (000)Assets: (cont’d)

Short-Term InvestmentsU.S. Treasury

Security $ — $ 8,214 $— $ 8,214

Investment Company 17,540 — — 17,540

Sovereign — 9,047 — 9,047Total

Short-Term Investments 17,540 17,261 — 34,801Foreign

Currency Forward Exchange Contracts — 5,253 — 5,253

Futures Contract 9 — — 9

Interest Rate Swap Agreement — 118 — 118

Total Assets 17,549 839,809 — 857,358

Liabilities:Foreign

Currency Forward Exchange Contracts — (7,280) — (7,280)

Futures Contracts (923) — — (923)

Total Liabilities (923) (7,280) — (8,203)Total $16,626 $832,529 $— $849,155

Transfers between investment levels may occur as themarkets fluctuate and/or the availability of data used in aninvestment’s valuation changes. The Fund recognizestransfers between the levels as of the end of the period. As ofApril 30, 2017, the Fund did not have any investmentstransfer between investment levels.



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April 30, 2017


3. Foreign Currency Translation and Foreign Investments:

The books and records of the Fund are maintained in U.S.dollars. Foreign currency amounts are translated into U.S.dollars as follows:

— investments, other assets and liabilities at theprevailing rate of exchange on the valuation date;

— investment transactions and investment income at theprevailing rates of exchange on the dates of suchtransactions.

Although the net assets of the Fund are presented at theforeign exchange rates and market values at the close of theperiod, the Fund does not isolate that portion of the resultsof operations arising as a result of changes in the foreignexchange rates from the fluctuations arising from changesin the market prices of securities held at period end.Similarly, the Fund does not isolate the effect of changes inforeign exchange rates from the fluctuations arising fromchanges in the market prices of securities sold during theperiod. Accordingly, realized and unrealized foreigncurrency gains (losses) on investments in securities areincluded in the reported net realized and unrealized gains(losses) on investment transactions and balances. However,pursuant to U.S. federal income tax regulations, gains andlosses from certain foreign currency transactions and theforeign currency portion of gains and losses realized onsales and maturities of foreign denominated debt securitiesare treated as ordinary income for U.S. federal income taxpurposes.

Net realized gains (losses) on foreign currency transactionsrepresent net foreign exchange gains (losses) from foreigncurrency forward exchange contracts, disposition of foreigncurrencies, currency gains (losses) realized between the tradeand settlement dates on securities transactions, and thedifference between the amount of investment income andforeign withholding taxes recorded on the Fund’s books and

the U.S. dollar equivalent amounts actually received or paid.Net unrealized currency gains (losses) from valuing foreigncurrency denominated assets and liabilities at period endexchange rates are reflected as a component of unrealizedappreciation (depreciation) in investments and foreigncurrency translations in the Statement of Assets andLiabilities. The change in unrealized currency gains (losses)on foreign currency translations for the period is reflected inthe Statement of Operations.

A significant portion of the Fund’s net assets consist ofsecurities of issuers located in emerging markets, which aredenominated in foreign currencies. Such securities may beconcentrated in a limited number of countries and regionsand may vary throughout the year. Changes in currencyexchange rates will affect the value of securities andinvestment income from foreign currency denominatedsecurities. Emerging market securities are often subject togreater price volatility, limited capitalization and liquidity,and higher rates of inflation than securities of companiesbased in the U.S. In addition, emerging market issuers maybe subject to substantial governmental involvement in theeconomy and greater social, economic and politicaluncertainty.

4. Structured Investments: The Fund invested a portion ofits assets in structured investments. A structuredinvestment is a derivative security designed to offer a returnlinked to a particular underlying security, currency,commodity or market. Structured investments may comein various forms including notes (such as exchange-tradednotes), warrants and options to purchase securities. TheFund will typically use structured investments to gainexposure to a permitted underlying security, currency,commodity or market when direct access to a market islimited or inefficient from a tax or cost standpoint. Therecan be no assurance that structured investments will tradeat the same price or have the same value as the underlying



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April 30, 2017


security, currency, commodity or market. Investments instructured investments involve risks including issuer risk,counterparty risk and market risk. Holders of structuredinvestments bear risks of the underlying investment and aresubject to issuer or counterparty risk because the Fund isrelying on the creditworthiness of such issuer orcounterparty and has no rights with respect to theunderlying investment. Certain structured investments maybe thinly traded or have a limited trading market and mayhave the effect of increasing the Fund’s illiquidity to theextent that the Fund, at a particular time, may be unable tofind qualified buyers for these securities.

5. Derivatives: The Fund may, but is not required to, usederivative instruments for a variety of purposes, includinghedging, risk management, portfolio management or toearn income. Derivatives are financial instruments whosevalue is based, in part, on the value of an underlying asset,interest rate, index or financial instrument. Prevailinginterest rates and volatility levels, among other things, alsoaffect the value of derivative instruments. A derivativeinstrument often has risks similar to its underlying assetand may have additional risks, including imperfectcorrelation between the value of the derivative and theunderlying asset, risks of default by the counterparty tocertain transactions, magnification of losses incurred due tochanges in the market value of the securities, instruments,indices or interest rates to which the derivative instrumentrelates, risks that the transactions may not be liquid andrisks arising from margin requirements. The use ofderivatives involves risks that are different from, andpossibly greater than, the risks associated with otherportfolio investments. Derivatives may involve the use ofhighly specialized instruments that require investmenttechniques and risk analyses different from those associatedwith other portfolio investments. All of the Fund’sholdings, including derivative instruments, are

marked-to-market each day with the change in valuereflected in unrealized appreciation (depreciation). Upondisposition, a realized gain or loss is recognized.

Certain derivative transactions may give rise to a form ofleverage. Leverage magnifies the potential for gain and therisk of loss. Leverage associated with derivative transactionsmay cause the Fund to liquidate portfolio positions when itmay not be advantageous to do so to satisfy its obligationsor to meet earmarking or segregation requirements,pursuant to applicable Securities and ExchangeCommission rules and regulations, or may cause the Fundto be more volatile than if the Fund had not beenleveraged. Although the Adviser seeks to use derivatives tofurther the Fund’s investment objectives, there is noassurance that the use of derivatives will achieve this result.

Following is a description of the derivative instruments andtechniques that the Fund used during the period and theirassociated risks:

Futures: A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of anunderlying asset, reference rate or index at a specific price ata specific future time. The value of a futures contract tendsto increase and decrease in tandem with the value of theunderlying instrument. Depending on the terms of theparticular contract, futures contracts are settled througheither physical delivery of the underlying instrument on thesettlement date or by payment of a cash settlement amounton the settlement date. During the period the futurescontract is open, payments are received from or made to thebroker based upon changes in the value of the contract (thevariation margin). A decision as to whether, when and howto use futures contracts involves the exercise of skill andjudgment and even a well-conceived futures transactionmay be unsuccessful because of market behavior orunexpected events. In addition to the derivatives risksdiscussed above, the prices of futures contracts can be highly



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April 30, 2017


volatile, using futures contracts can lower total return, andthe potential loss from futures contracts can exceed theFund’s initial investment in such contracts. No assurancecan be given that a liquid market will exist for any particularfutures contract at any particular time. There is also the riskof loss by the Fund of margin deposits in the event ofbankruptcy of a broker with which the Fund has openpositions in the futures contract.

Foreign Currency Forward Exchange Contracts: Inconnection with its investments in foreign securities, theFund also entered into contracts with banks, brokers ordealers to purchase or sell securities or foreign currencies ata future date. A foreign currency forward exchange contract(“currency contract”) is a negotiated agreement between thecontracting parties to exchange a specified amount ofcurrency at a specified future time at a specified rate. Therate can be higher or lower than the spot rate between thecurrencies that are the subject of the contract. Currencycontracts may be used to protect against uncertainty in thelevel of future foreign currency exchange rates or to gain ormodify exposure to a particular currency. To the extenthedged by the use of currency contracts, the precisematching of the currency contract amounts and the value ofthe securities involved will not generally be possible becausethe future value of such securities in foreign currencies willchange as a consequence of market movements in the valueof those securities between the date on which the contract isentered into and the date it matures. Furthermore, suchtransactions may reduce or preclude the opportunity forgain if the value of the currency should move in thedirection opposite to the position taken. There is additionalrisk to the extent that currency contracts create exposure tocurrencies in which the Fund’s securities are notdenominated. Unanticipated changes in currency pricesmay result in poorer overall performance for the Fund thanif it had not entered into such contracts. The use ofcurrency contracts involves the risk of loss from the

insolvency or bankruptcy of the counterparty to thecontract or the failure of the counterparty to makepayments or otherwise comply with the terms of thecontract. A currency contract is marked-to-market daily andthe change in market value is recorded by the Fund asunrealized gain or loss. The Fund records realized gains(losses) when the currency contract is closed equal to thedifference between the value of the currency contract at thetime it was opened and the value at the time it was closed.

Swaps: The Fund may enter into OTC swap contracts orcleared swap transactions. A swap contract is an agreementbetween two parties pursuant to which the parties exchangepayments at specified dates on the basis of a specifiednotional amount, with the payments calculated by referenceto specified securities, indices, reference rates, currencies orother instruments. Typically swap agreements provide thatwhen the period payment dates for both parties are thesame, the payments are made on a net basis (i.e., the twopayment streams are netted out, with only the net amountpaid by one party to the other). The Fund’s obligations orrights under a swap contract entered into on a net basis willgenerally be equal only to the net amount to be paid orreceived under the agreement, based on the relative values ofthe positions held by each party. Cleared swap transactionsmay help reduce counterparty credit risk. In a cleared swap,the Fund’s ultimate counterparty is a clearinghouse ratherthan a swap dealer, bank or other financial institution. OTCswap agreements are not entered into or traded onexchanges and often there is no central clearing or guarantyfunction for OTC swaps. These OTC swaps are oftensubject to credit risk or the risk of default or non-performance by the counterparty. Both OTC and clearedswaps could result in losses if interest rates, foreign currencyexchange rates or other factors are not correctly anticipatedby the Fund or if the reference index, security orinvestments do not perform as expected. During the periodswap agreements are open, payments are received from or



23


April 30, 2017


made to the clearinghouse or counterparty based uponchanges in the value of the contract (variation margin). TheDodd-Frank Wall Street Reform and Consumer ProtectionAct and related regulatory developments require the clearingand exchange-trading of certain standardized swaptransactions. Mandatory exchange-trading and clearing isoccurring on a phased-in basis.

When the Fund has an unrealized loss on a swapagreement, the Fund has instructed the custodian to pledgecash or liquid securities as collateral with a valueapproximately equal to the amount of the unrealized loss.Collateral pledges are monitored and subsequently adjustedif and when the swap valuations fluctuate. If applicable,cash collateral is included with “Due from (to) Broker” inthe Statement of Assets and Liabilities.

FASB ASC 815, “Derivatives and Hedging” (“ASC 815”),is intended to improve financial reporting about derivativeinstruments by requiring enhanced disclosures to enableinvestors to better understand how and why the Fund usesderivative instruments, how these derivative instrumentsare accounted for and their effects on the Fund’s financialposition and results of operations.

The following tables set forth the fair value of the Fund’sderivative contracts by primary risk exposure as ofApril 30, 2017.

Asset Derivatives Statement of Assets and Primary Risk Value Liabilities Location Exposure (000)

Foreign Currency Unrealized Appreciation Forward Exchange on Foreign Currency Contracts Forward Exchange

Contracts Currency Risk $5,253Futures Contract Variation Margin on Interest

Futures Contract Rate Risk 9(a)Swap Agreement Variation Margin on Interest

Swap Agreement Rate Risk 118(a)

Total $5,380

Liability Derivatives Statement of Assets and Primary Risk Value Liabilities Location Exposure (000)

Foreign Currency Unrealized Depreciation Forward Exchange on Foreign Currency Contracts Forward Exchange

Contracts Currency Risk $(7,280)Futures Contracts Variation Margin on Interest

Futures Contracts Rate Risk (923)(a)

Total $(8,203)

(a)This amount represents the cumulative appreciation(depreciation) as reported in the Portfolio of Investments.The Statement of Assets and Liabilities only reflects thecurrent day’s net variation margin.

The following tables set forth by primary risk exposure theFund’s realized gains (losses) and change in unrealizedappreciation (depreciation) by type of derivative contractfor the six months ended April 30, 2017 in accordancewith ASC 815.

Realized Gain (Loss)

Primary Risk Derivative ValueExposure Type (000)

Foreign Currency Forward Currency Risk Exchange Contracts $(3,070)Interest Rate Risk Futures Contracts 33Interest Rate Risk Swap Agreement 12

Total $(3,025)

Change in Unrealized Appreciation (Depreciation)

Primary Risk Derivative ValueExposure Type (000)

Foreign Currency Forward Currency Risk Exchange Contracts $(1,025)Interest Rate Risk Futures Contracts (1,291)Interest Rate Risk Swap Agreement 118

Total $(2,198)



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April 30, 2017


At April 30, 2017, the Fund’s derivative assets and liabilitiesare as follows:

Gross Amounts of Assets and Liabilities Presented in theStatement of Assets and Liabilities

Assets(c) Liabilities(c)Derivatives(b) (000) (000)

Foreign Currency

Forward Exchange Contracts $5,253 $(7,280)

(b)Excludes exchange traded derivatives.(c)Absent an event of default or early termination, OTC

derivative assets and liabilities are presented gross and notoffset in the Statement of Assets and Liabilities.

The Fund typically enters into International Swaps andDerivatives Association, Inc. Master Agreements (“ISDAMaster Agreements”) or similar master agreements(collectively, “Master Agreements”) with its contractcounterparties for certain OTC derivatives in order to,among other things, reduce its credit risk to counterparties.ISDA Master Agreements include provisions for generalobligations, representations, collateral and events of defaultor termination. Under an ISDA Master Agreement, theFund typically may offset with the counterparty certainOTC derivative financial instruments’ payables and/orreceivables with collateral held and/or posted and create onesingle net payment (close-out netting) in the event ofdefault, termination and/or potential deterioration in thecredit quality of the counterparty. Various MasterAgreements govern the terms of certain transactions withcounterparties, including transactions such as swap, forward,repurchase and reverse repurchase agreements. These MasterAgreements typically attempt to reduce the counterparty riskassociated with such transactions by specifying creditprotection mechanisms and providing standardization thatimproves legal certainty. Cross-termination provisions underMaster Agreements typically provide that a default inconnection with one transaction between the Fund and a

counterparty gives the non-defaulting party the right toterminate any other transactions in place with the defaultingparty to create one single net payment due to/due from thedefaulting party and may be a feature in certain MasterAgreements. In the event the Fund exercises its right toterminate a Master Agreement after a counterpartyexperiences a termination event as defined in the MasterAgreement, the return of collateral with market value inexcess of the Fund’s net liability may be delayed or denied.

The following tables present derivative financialinstruments that are subject to enforceable nettingarrangements as of April 30, 2017.

Gross Amounts Not Offset in the Statement of Assets and Liabilities

Gross Asset Derivatives Presented in Net Statement of Amount Assets and Financial Collateral (not less Liabilities Instrument Received than $0)Counterparty (000) (000) (000)(d) (000)

Citibank NA $2,656 $(2,656) $ — $0

JPMorgan Chase

Bank NA 2,597 (2,238) (359) 0

Total $5,253 $(4,894) $(359) $0

(d)In some instances, the actual collateral received may bemore than the amount shown here due toovercollateralization.

Gross Amounts Not Offset in the Statement of Assets and Liabilities

Gross Liability Derivatives Presented in Net Statement of Amount Assets and Financial Collateral (not less Liabilities Instrument Pledged than $0)Counterparty (000) (000) (000) (000)

Citibank NA $5,042 $(2,656) $(2,186) $200

JPMorgan Chase

Bank NA 2,238 (2,238) — 0

Total $7,280 $(4,894) $(2,186) $200



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For the six months ended April 30, 2017, the approximateaverage monthly amount outstanding for each derivativetype is as follows:

Foreign Currency Forward Exchange Contracts:Average monthly principal amount .................$813,207,000

Futures Contracts:Average monthly original value ......................$163,137,000

Swap Agreements:Average monthly notional amount ......................$3,803,000

6. Indemnifications: The Fund enters into contracts thatcontain a variety of indemnifications. The Fund’s maximumexposure under these arrangements is unknown. However,the Fund has not had prior claims or losses pursuant tothese contracts and expects the risk of loss to be remote.

7. Dividends and Distributions to Stockholders: Dividendincome and distributions to stockholders are recorded on theex-dividend date. Dividends from net investment income, ifany, are declared and paid quarterly. Net realized capitalgains, if any, are distributed at least annually.

8. Other: Security transactions are accounted for on thedate the securities are purchased or sold. Realized gains(losses) on the sale of investment securities are determinedon the specific identified cost basis. Interest income isrecognized on the accrual basis except where collection is indoubt and is recorded net of foreign withholding tax.Dividend income and distributions are recorded on theex-dividend date (except for certain dividends which maybe recorded as soon as the Fund is informed of suchdividends) net of applicable withholding taxes.

B. Advisory Fees: The Adviser, a wholly-owned subsidiaryof Morgan Stanley, provides the Fund with advisory servicesunder the terms of an Investment Advisory Agreement,calculated weekly and payable monthly, at an annual rate of1.00% of the Fund’s average weekly managed assets.

C. Administration Fees: The Adviser also serves asAdministrator to the Fund and provides administrative servicespursuant to an Administration Agreement for an annual fee,accrued daily and paid monthly, of 0.08% of the Fund’s averageweekly managed assets.

Under a Sub-Administration Agreement between theAdministrator and State Street Bank and Trust Company (“StateStreet”), State Street provides certain administrative services tothe Fund. For such services, the Administrator pays State Streeta portion of the fee the Administrator receives from the Fund.

D. Custodian Fees: State Street (the “Custodian”) and itsaffiliates serve as Custodian for the Fund in accordance with aCustodian Agreement. The Custodian holds cash, securities, andother assets of the Fund as required by the Act. Custody fees arepayable monthly based on assets held in custody, investmentpurchases and sales activity and account maintenance fees, plusreimbursement for certain out-of-pocket expenses.

E. Federal Income Taxes: It is the Fund’s intention tocontinue to qualify as a regulated investment company anddistribute all of its taxable income. Accordingly, no provision forfederal income taxes is required in the financial statements.

The Fund may be subject to taxes imposed by countries in whichit invests. Such taxes are generally based on income and/or capitalgains earned or repatriated. Taxes are accrued and applied to netinvestment income, net realized gains and net unrealizedappreciation as such income and/or gains are earned. Taxes mayalso be based on transactions in foreign currency and are accruedbased on the value of investments denominated in such currency.

FASB ASC 740-10, “Income Taxes — Overall”, sets forth aminimum threshold for financial statement recognition of thebenefit of a tax position taken or expected to be taken in a taxreturn. Management has concluded there are no significantuncertain tax positions that would require recognition in thefinancial statements. If applicable, the Fund recognizes interestaccrued related to unrecognized tax benefits in “Interest



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Expense” and penalties in “Other Expenses” in the Statement ofOperations. The Fund files tax returns with the U.S. InternalRevenue Service, New York and various states. Each of the taxyears in the four-year period ended October 31, 2016, remainssubject to examination by taxing authorities.

The tax character of distributions paid may differ from thecharacter of distributions shown in the Statements of Changes inNet Assets due to short-term capital gains being treated as ordinaryincome for tax purposes. The tax character of distributions paidduring fiscal years 2016 and 2015 was as follows:

2016 Distributions 2015 Distributions Paid From: Paid From:

Paid-in- Paid-in- Capital Capital (000) (000)

$51,099 $62,394

The amount and character of income and capital gaindistributions to be paid by the Fund are determined inaccordance with federal income tax regulations which may differfrom GAAP. These book/tax differences are considered eithertemporary or permanent in nature.

Temporary differences are attributable to differing book and taxtreatments for the timing of the recognition of gains (losses) oncertain investment transactions, the timing of the deductibility ofcertain expenses and the recognition of premium amortization.

Permanent differences, primarily due to differing treatments ofgains (losses) related to foreign currency transactions, premiumamortization adjustments for certain securities sold and a netoperating loss, resulted in the following reclassifications amongthe components of net assets at October 31, 2016:

Accumulated Accumulated Net Investment Net Realized Paid-in- Loss Loss Capital (000) (000) (000)

$(66,283) $178,533 $(112,250)

At October 31, 2016, the Fund had no distributable earnings ona tax basis.

At October 31, 2016, the Fund had available for federal incometax purposes unused short term and long term capital losses ofapproximately $8,256,000 and $40,152,000, respectively, thatdo not have an expiration date.

To the extent that capital loss carryforwards are used to offsetany future capital gains realized during the carryover period asprovided by U.S. federal income tax regulations, no capital gainstax liability will be incurred by the Fund for gains realized andnot distributed. To the extent that capital gains are offset, suchgains will not be distributed to the stockholders.

The amount of net investment income to be paid by the Fund isdetermined in accordance with federal income tax regulations. Itis possible that all or a portion of the Fund’s fiscal year 2017dividend may be a return of capital and that determinationcannot yet be made.

F. Security Transactions and Transactions with Affiliates:

For the six months ended April 30, 2017, purchases and sales ofinvestment securities for the Fund, other than long-term U.S.Government securities and short-term investments, wereapproximately $274,828,000 and $305,570,000, respectively.There were no purchases and sales of long-term U.S.Government securities for the six months ended April 30, 2017.

The Fund invests in the Institutional Class of the MorganStanley Institutional Liquidity Funds — Treasury SecuritiesPortfolio (the “Liquidity Funds”), an open-end managementinvestment company managed by the Adviser. Advisory fees paidby the Fund are reduced by an amount equal to its pro-rata shareof the advisory and administration fees paid by the Fund due toits investment in the Liquidity Funds. For the six months endedApril 30, 2017, advisory fees paid were reduced by approximately$9,000 relating to the Fund’s investment in the Liquidity Funds.



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A summary of the Fund’s transactions in shares of the LiquidityFunds during the six months ended April 30, 2017 is as follows:

Value ValueOctober 31, Purchases Dividend April 30, 2016 at Cost Sales Income 2017 (000) (000) (000) (000) (000)

$— $163,095 $145,555 $19 $17,540

The Fund is permitted to purchase and sell securities(“cross-trade”) from and to other Morgan Stanley Funds as wellas other funds and client accounts for which the Adviser or anaffiliate of the Adviser serves as investment adviser, pursuant toprocedures approved by the Directors in compliance withRule 17a-7 under the Act (the “Rule”). Each cross-trade isexecuted at the current market price in compliance withprovisions of the Rule. For the six months ended April 30, 2017,the Fund did not engage in any cross-trade transactions.

The Fund has an unfunded Deferred Compensation Plan (the“Compensation Plan”), which allows each independent Directorto defer payment of all, or a portion, of the fees he or she receivesfor serving on the Board of Directors. Each eligible Directorgenerally may elect to have the deferred amounts credited with areturn equal to the total return on one or more of the MorganStanley funds that are offered as investment options under theCompensation Plan. Appreciation/depreciation and distributionsreceived from these investments are recorded with an offsettingincrease/decrease in the deferred compensation obligation and donot affect the NAV of the Fund.

G. Credit Facility: The Fund will use the proceeds from theuse of leverage to purchase additional securities consistent withthe Fund’s investment objectives, policies and strategies. TheFund has entered into an agreement with State Street asAdministrative Agent and sole lender to provide a revolving lineof credit facility (“facility”) in the amount of $400,000,000. Theloans under the facility will bear interest at the rate of LIBORfor the applicable interest period plus a spread. The facility alsohas a commitment fee of 0.10% of the unused portion of thefacility. The average borrowings and interest rate for the six

months ended April 30, 2017 were approximately $264,938,000and 2.04%, respectively. During the same period, the Fundincurred approximately $2,727,000 in interest expenseassociated with the outstanding loans.

H. Other: As permitted by the Fund’s offering prospectus,on January 10, 2008, the Fund commenced a share repurchaseprogram for purposes of enhancing stockholder value andreducing the discount at which the Fund’s shares trade fromtheir NAV. During the six months ended April 30, 2017, theFund did not repurchase any of its shares. Since the inception ofthe program, the Fund has repurchased 6,191,936 of its sharesat an average discount of 14.91% from NAV. The Directorsregularly monitor the Fund’s share repurchase program as part oftheir review and consideration of the Fund’s premium/discounthistory. The Fund expects to continue to repurchase itsoutstanding shares at such time and in such amounts as itbelieves will further the accomplishment of the foregoingobjectives, subject to review by the Directors. You can accessinformation about the monthly share repurchase results throughMorgan Stanley Investment Management’s website:www.morganstanley.com/im.

At April 30, 2017, the Fund did not have record owners of 10%or greater.

I. Accounting Pronouncement: In October 2016, theSecurities and Exchange Commission (“SEC”) issued a new rule,Investment Company Reporting Modernization, which, amongother provisions, amends Regulation S-X to requirestandardized, enhanced disclosures, particularly related toderivatives, in investment company financial statements.Compliance with the guidance is effective for financialstatements filed with the SEC on or after August 1, 2017;adoption will have no effect on the Fund’s net assets or results ofoperations. Although still evaluating the potential impacts of theInvestment Company Reporting Modernization to the Fund,management expects that the impact of the Fund’s adoption willbe limited to additional financial statement disclosures.



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For More Information About Portfolio Holdings

The Fund provides a complete schedule of portfolio holdings inits semi-annual and annual reports within 60 days of the end ofthe Fund’s second and fourth fiscal quarters. The semi-annualreports and the annual reports are filed electronically with theSecurities and Exchange Commission (SEC) on Form N-CSRSand Form N-CSR, respectively. Morgan Stanley also delivers thesemi-annual and annual reports to Fund stockholders and makesthese reports available on its public website,www.morganstanley.com/im. Each Morgan Stanley fund alsofiles a complete schedule of portfolio holdings with the SEC forthe Fund’s first and third fiscal quarters on Form N-Q. MorganStanley does not deliver the reports for the first and third fiscalquarters to stockholders, nor are the reports posted to theMorgan Stanley public website. You may, however, obtain theForm N-Q filings (as well as the Form N-CSR and N-CSRSfilings) by accessing the SEC’s website, www.sec.gov. You mayalso review and copy them at the SEC’s Public ReferenceRoom in Washington, DC. Information on the operation of theSEC’s Public Reference Room may be obtained by calling theSEC toll free at 1(800) SEC-0330. You can also request copiesof these materials, upon payment of a duplicating fee, byelectronic request at the SEC’s e-mail address([email protected]) or by writing the public reference room ofthe SEC, 100 F Street, NE, Washington, DC 20549-0102.

In addition to filing a complete schedule of portfolio holdingswith the SEC each fiscal quarter, the Fund makes portfolioholdings information available by providing the information onits public website, www.morganstanley.com/im. The Fundprovides a complete schedule of portfolio holdings on the publicwebsite on a monthly basis at least 15 calendar days after monthend and under other conditions as described in the Fund’s policyon portfolio holdings disclosure. You may obtain copies of theFund’s monthly website postings by calling toll free1(800) 231-2608.

Proxy Voting Policy and Procedures and Proxy VotingRecord

A copy of (1) the Fund’s policies and procedures with respect tothe voting of proxies relating to the Fund’s portfolio securities;and (2) how the Fund voted proxies relating to portfoliosecurities during the most recent twelve-month period endedJune 30, is available without charge, upon request, by calling tollfree 1(800) 231-2608 or by visiting our website atwww.morganstanley.com/im. This information is also availableon the SEC’s web site at www.sec.gov.



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April 30, 2017

Portfolio Management (unaudited)

The Fund is managed by members of the Emerging Markets Debt team. The team consists of portfolio managers, analysts and traders.The members of the team jointly and primarily responsible for the day-to-day management of the Fund are Eric J. Baurmeister, aManaging Director of the Adviser, Warren Mar, a Managing Director of the Adviser and Sahil Tandon, an Executive Director of theAdviser. Mr. Baurmeister has been associated with the Adviser in an investment management capacity since 1997. Mr. Baurmeisterbegan managing the Fund in July 2002. Mr. Mar has been associated with the Adviser in an investment management capacity sinceAugust 2012. Prior to August 2012, Mr. Mar was the global head of Emerging Markets Corporate Research & Strategy at J.P. MorganChase from April 2004 to August 2012. Mr. Tandon has been associated with the Adviser in an investment management capacity since2004.

Merrill Corp - MS Emerging Markets Domestic Debt Fund_ Inc. Semi-Annual Report [Funds] 04-30-2017 ED [AUX] | cmashak | 21-Jun-17 00:09 | 17-13145-10.fa | Sequence: 1CHKSUM Content: 39828 Layout: 24584 Graphics: No Graphics CLEAN


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April 30, 2017

Investment Policy (unaudited)

DerivativesThe Fund may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management,portfolio management or to earn income. A derivative is a financial instrument whose value is based, in part, on the value of anunderlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other things, alsoaffect the value of derivative instruments. A derivative instrument often has risks similar to its underlying asset and may haveadditional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by thecounterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments,indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid and risks arising frommargin requirements. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated withother portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques andrisk analyses different from those associated with other portfolio investments. In addition, proposed regulatory changes by theSecurities and Exchange Commission (“SEC”) relating to a mutual fund’s use of derivatives could potentially limit or impact theFund’s ability to invest in derivatives and adversely affect the value or performance of the Fund or its derivative investments.

Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss.Leverage associated with derivative transactions may cause the Fund to liquidate portfolio positions when it may not be advantageousto do so to satisfy its obligations or to meet earmarking or segregation requirements, pursuant to applicable SEC rules and regulations,or may cause the Fund to be more volatile than if the Fund had not been leveraged. Although the Adviser seeks to use derivatives tofurther the Fund’s investment objective, there is no assurance that the use of derivatives will achieve this result.

Following is a description of the derivative instruments and techniques that the Fund may use and their associated risks:

Foreign Currency Forward Exchange Contracts. In connection with its investments in foreign securities, the Fund also may enter intocontracts with banks, brokers or dealers to purchase or sell securities or foreign currencies at a future date. A foreign currency forwardexchange contract (“currency contract”) is a negotiated agreement between the contracting parties to exchange a specified amount ofcurrency at a specified future time at a specified rate. The rate can be higher or lower than the spot rate between the currencies that arethe subject of the contract. The Fund may also invest in non-deliverable foreign currency forward exchange contracts (“NDFs”).NDFs are similar to other foreign currency forward exchange contracts, but do not require or permit physical delivery of currencyupon settlement. Instead, settlement is made in cash based on the difference between the contracted exchange rate and the spot foreignexchange rate at settlement. Currency contracts may be used to protect against uncertainty in the level of future foreign currencyexchange rates or to gain or modify exposure to a particular currency. In addition, the Fund may use cross currency hedging or proxyhedging with respect to currencies in which the Fund has or expects to have portfolio or currency exposure. Cross currency and proxyhedges involve the sale of one currency against the positive exposure to a different currency and may be used for hedging purposes orto establish an active exposure to the exchange rate between any two currencies. To the extent hedged by the use of currency contracts,the precise matching of the currency contract amounts and the value of the securities involved will not generally be possible becausethe future value of such securities in foreign currencies will change as a consequence of market movements in the value of those



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Investment Policy (unaudited) (cont’d)

securities between the date on which the contract is entered into and the date it matures. Furthermore, such transactions may reduceor preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken. There isadditional risk that such transactions may reduce or preclude the opportunity for gain if the value of the currency should move in thedirection opposite to the position taken and that currency contracts create exposure to currencies in which the Fund’s securities are notdenominated. The use of currency contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to thecontract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract.

Futures. A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset,reference rate or index at a specific price at a specific future time. The value of a futures contract tends to increase or decrease intandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are settledthrough either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount onthe settlement date. A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment andeven a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to thederivatives risks discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower total return,and the potential loss from futures contracts can exceed the Fund’s initial investment in such contracts. No assurance can be given thata liquid market will exist for any particular futures contract at any particular time. There is also the risk of loss by the Fund of margindeposits in the event of bankruptcy of a broker with which the Fund has open positions in the futures contract.

Loan Participation Notes. The Fund may invest in loan participation notes (“LPNs”), which are interests in loans or other direct debtinstruments relating to amounts owed by a corporate, governmental or other borrower to another party. LPNs are notes issued througha special purpose vehicle for the purpose of funding or acquiring a loan to final obligor. LPNs are subject to the same risks as otherdebt obligations, which may include credit risk, interest rate risk, liquidity risk and market risk. LPNs have limited recourse to theissuer, to the extent of the amount received by the issuer from the ultimate borrower in paying the principal and interest amounts asdefined under the loan agreement. The Fund may be exposed to the credit risk of both the lender and the borrower, and may notbenefit from any collateral supporting the underlying loan.

Options. If the Fund buys an option, it buys a legal contract giving it the right to buy or sell a specific amount of the underlyinginstrument or futures contract on the underlying instrument or foreign currency at an agreed-upon price typically in exchange for apremium paid by the Fund. If the Fund sells an option, it sells to another person the right to buy from or sell to the Fund a specificamount of the underlying instrument or foreign currency or futures contract on the underlying instrument or foreign currency at anagreed-upon price typically in exchange for a premium received by the Fund. When options are purchased over-the-counter (“OTC”),the Fund bears the risk that the counterparty that wrote the option will be unable or unwilling to perform its obligations under theoption contract. Options may also be illiquid and the Fund may have difficulty closing out its position. A decision as to whether,when and how to use options involves the exercise of skill and judgment and even a well-conceived option transaction may beunsuccessful because of market behavior or unexpected events. The prices of options can be highly volatile and the use of options canlower total returns.



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Structured Investments. The Fund also may invest a portion of its assets in structured investments. A structured investment is aderivative security designed to offer a return linked to a particular underlying security, currency, commodity or market. Structuredinvestments may come in various forms including notes (such as exchange-traded notes), warrants and options to purchase securities.The Fund will typically use structured investments to gain exposure to a permitted underlying security, currency, commodity ormarket when direct access to a market is limited or inefficient from a tax or cost standpoint. There can be no assurance that structuredinvestments will trade at the same price or have the same value as the underlying security, currency, commodity or market. Investmentsin structured investments involve risks including issuer risk, counterparty risk and market risk. Holders of structured investments bearrisks of the underlying investment and are subject to issuer or counterparty risk because the Fund is relying on the creditworthiness ofsuch issuer or counterparty and has no rights with respect to the underlying investment. Certain structured investments may be thinlytraded or have a limited trading market and may have the effect of increasing the Fund’s illiquidity to the extent that the Fund, at aparticular point in time, may be unable to find qualified buyers for these securities.

Swaps. The Fund may enter into OTC swap contracts or cleared swap transactions. An OTC swap contract is an agreement betweentwo parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with thepayments calculated by reference to specified securities, indices, reference rates, currencies or other instruments. Typically swapagreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., thetwo payment streams are netted out, with only the net amount paid by one party to the other). The Fund’s obligations or rights under aswap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement,based on the relative values of the positions held by each party. Cleared swap transactions may help reduce counterparty credit risk. In acleared swap, the Fund’s ultimate counterparty is a clearinghouse rather than a swap dealer, bank or other financial institution. OTCswap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for swaps. TheseOTC swaps are often subject to credit risk or the risk of default or non- performance by the counterparty. Both OTC and cleared swapscould result in losses if interest rates, foreign currency exchange rates or other factors are not correctly anticipated by the Fund or if thereference index, security or investments do not perform as expected. The Fund’s use of swaps may include those based on the credit ofan underlying security, commonly referred to as “credit default swaps.” Where the Fund is the buyer of a credit default swap contract, itwould typically be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to thecontract only in the event of a default or similar event of the issuer of the referenced debt obligation. If no default occurs, the Fundwould have paid to the counterparty a periodic stream of payments over the term of the contract and received no benefit from thecontract. When the Fund is the seller of a credit default swap contract, it typically receives the stream of payments but is obligated to payan amount equal to the par (or other agreed-upon) value of a referenced debt obligation upon the default or similar event of the issuer ofthe referenced debt obligation. The Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulatory developmentsrequire the clearing and exchange-trading of certain standardized swap transactions. Mandatory exchange-trading and clearing isoccurring on a phased-in basis.

Special Risks Related to Cyber SecurityThe Fund and its service providers are susceptible to cyber security risks that include, among other things, theft, unauthorizedmonitoring, release, misuse, loss, destruction or corruption of confidential and highly restricted data; denial of service attacks;



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April 30, 2017


unauthorized access to relevant systems; compromises to networks or devices that the Fund and its service providers use to service theFund’s operations; or operational disruption or failures in the physical infrastructure or operating systems that support the Fund andits service providers. Cyber attacks against or security breakdowns of the Fund or its service providers may adversely impact the Fundand its stockholders, potentially resulting in, among other things, financial losses; the inability of Fund stockholders to transactbusiness and the Fund to process transactions; inability to calculate the Fund’s NAV; violations of applicable privacy and other laws;regulatory fines, penalties, reputational damage, reimbursement or other compensation costs; and/or additional compliance costs. TheFund may incur additional costs for cyber security risk management and remediation purposes. In addition, cyber security risks mayalso impact issuers of securities in which the Fund invests, which may cause the Fund’s investment in such issuers to lose value. Therecan be no assurance that the Fund or its service providers will not suffer losses relating to cyber attacks or other information securitybreaches in the future.

Foreign and Emerging Market SecuritiesInvesting in the securities of foreign issuers, particularly those located in emerging market or developing countries, entails the risk thatnews and events unique to a country or region will affect those markets and their issuers. The value of the Fund’s shares may varywidely in response to political and economic factors affecting companies in foreign countries. These same events will not necessarilyhave an effect on the U.S. economy or similar issuers located in the United States. In addition, investments in certain foreign marketsthat have historically been considered stable may become more volatile and subject to increased risk due to ongoing developments andchanging conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increasedthe probability that adverse developments and conditions in one country or region will affect the stability of economies and financialmarkets in other countries or regions.

Investments in foreign markets entail special risks such as currency, political, economic and market risks. There also may be greatermarket volatility, less reliable financial information, higher transaction and custody costs, decreased market liquidity and lessgovernment and exchange regulation associated with investments in foreign markets. Certain foreign markets may rely heavily onparticular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctionsagainst a particular country or countries, organizations, entities and/or individuals, changes in international trading patterns, tradebarriers, and other protectionist or retaliatory measures. Economic sanctions could, among other things, effectively restrict or eliminatethe Fund’s ability to purchase or sell securities or groups of securities for a substantial period of time, and may make the Fund’sinvestments in such securities harder to value. Investments in foreign markets may also be adversely affected by governmental actionssuch as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition ofpunitive taxes. The governments of certain countries may prohibit or impose substantial restrictions on foreign investing in theircapital markets or in certain sectors or industries. In addition, a foreign government may limit or cause delay in the convertibility orrepatriation of its currency which would adversely affect the U.S. dollar value and/or liquidity of investments denominated in thatcurrency. Certain foreign investments may become less liquid in response to market developments or adverse investor perceptions, orbecome illiquid after purchase by the Fund, particularly during periods of market turmoil. When the Fund holds illiquid investments,its portfolio may be harder to value. The risks of investing in emerging market countries are greater than risks associated with



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April 30, 2017


investments in foreign developed countries. In addition, the Fund’s investments in foreign issuers may be denominated in foreigncurrencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange rates.

Temporary InvestmentsThe investment policies, limitations or practices of the Fund may not apply during periods of unusual or adverse market, economic,political or other conditions. Such market, economic, political or other conditions may include periods of abnormal or heightenedmarket volatility, strained credit and/or liquidity conditions or increased governmental intervention in the markets or industries.During such periods, the Fund may not invest according to its principal investment strategies or in the manner in which its name maysuggest, and may be subject to different and/or heightened risks. It is possible that such unusual or adverse conditions may continuefor extended periods of time. During such periods, the Fund may, for temporary defensive purposes, reduce its holdings in debtobligations of issuers located in emerging markets countries that are denominated in the local currency and invest in certain liquidshort-term (less than one year to maturity) and medium-term (not greater than five years to maturity) debt securities or hold cash. Theshort-term and medium-term debt securities in which the Fund may invest consist of (a) obligations of the U.S., emerging market orother foreign governments, their respective agencies or instrumentalities; (b) bank deposits and bank obligations (including certificatesof deposit, time deposits and bankers’ acceptances) of U.S. or foreign banks denominated in any currency; (c) floating rate securitiesand other instruments denominated in any other currency issued by various governments or international development agencies;(d) finance company and corporate commercial paper and other short-term corporate debt obligations of United States, emergingmarket or other foreign corporations; and (e) repurchase agreements with banks and broker-dealers with respect to such securities. TheFund intends to invest for temporary defensive purposes only in short-term and medium-term debt securities that the Adviser believesto be of high quality, i.e., subject to relatively low risk of loss of interest or principal (there is currently no rating system for debtsecurities in certain emerging market countries in which the Fund may invest).

Determination of NAVThe Fund determines the NAV per share as of the close of the NYSE (normally 4:00 p.m. Eastern time) on each day that the NYSE isopen for business. Shares generally will not be priced on days that the NYSE is closed, although shares may be priced on such days ifthe Securities Industry and Financial Markets Association (“SIFMA”) recommends that the bond markets remain open for all or partof the day. On any business day when SIFMA recommends that the bond markets close early, the Fund reserves the right to price itsshares at or prior to the SIFMA recommended closing time. If the NYSE is closed due to inclement weather, technology problems orany other reason on a day it would normally be open for business, or the NYSE has an unscheduled early closing on a day it hasopened for business, the Fund reserves the right to treat such day as a business day and calculate its NAV as of the normally scheduledclose of regular trading on the NYSE for that day, so long as the Adviser believes there generally remains an adequate market to obtainreliable and accurate market quotations. The Fund may elect to price its shares on days when the NYSE is closed but the primarysecurities markets on which the Fund’s securities trade remain open.



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April 30, 2017

Dividend Reinvestment Plan (unaudited)

Pursuant to the Dividend Reinvestment Plan (the Plan), each stockholder will be deemed to have elected, unless Computershare TrustCompany, N.A. (the Plan Agent) is otherwise instructed by the stockholder in writing, to have all distributions automaticallyreinvested in Fund shares.

Dividend and capital gain distributions (Distribution) will be reinvested on the reinvestment date in full and fractional shares. If themarket price per share equals or exceeds net asset value per share on the reinvestment date, the Fund will issue shares to participants atnet asset value or, if net asset value is less than 95% of the market price on the reinvestment date, shares will be issued at 95% of themarket price. If net asset value exceeds the market price on the reinvestment date, participants will receive shares valued at marketprice. The Fund may purchase shares of its Common Stock in the open market in connection with dividend reinvestmentrequirements at the discretion of the Board of Directors. Should the Fund declare a Distribution payable only in cash, the Plan Agentwill purchase Fund shares for participants in the open market as agent for the participants.

The Plan Agent’s fees for the reinvestment of a Distribution will be paid by the Fund. However, each participant’s account will becharged a pro rata share of brokerage commissions incurred on any open market purchases effected on such participant’s behalf.Although stockholders in the Plan may receive no cash distributions, participation in the Plan will not relieve participants of anyincome tax which may be payable on such dividends or distributions.

In the case of stockholders, such as banks, brokers or nominees, that hold shares for others who are the beneficial owners, the PlanAgent will administer the Plan on the basis of the number of shares certified from time to time by the stockholder as representing thetotal amount registered in the stockholder’s name and held for the account of beneficial owners who are participating in the Plan.

Stockholders who do not wish to have Distributions automatically reinvested should notify the Plan Agent in writing. There is nopenalty for non-participation or withdrawal from the Plan, and stockholders who have previously withdrawn from the Plan may rejoinat any time. Requests for additional information or any correspondence concerning the Plan should be directed to the Plan Agent at:

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.Computershare Trust Company, N.A.P.O. Box 30170College Station, Texas 778421 (800) 231-2608



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Privacy Notice (unaudited)

Morgan Stanley Investment Management Inc.An Important Notice Concerning Our U.S. Privacy PolicyWe are required by federal law to provide you with a copy of our privacy policy annually. This policy applies to current and formerindividual investors in funds managed or sponsored by Morgan Stanley Investment Management Inc. (“MSIM”) as well as current andformer individual clients of MSIM. This policy is not applicable to partnerships, corporations, trusts or other non-individual clients orinvestors. Please note that we may amend this policy at any time, and will inform you of any changes as required by law.

We Respect Your PrivacyWe appreciate that you have provided us with your personal financial information. We strive to maintain the privacy of suchinformation while we help you achieve your financial objectives. This Notice describes what non-public personal information wecollect about you, why we collect it, when we may share it with others and how certain others may use it. It discusses the steps youmay take to limit our sharing of certain information about you to affiliated companies in the Morgan Stanley family of companies(“other Morgan Stanley companies”). It also discloses how you may limit use of certain shared information for marketing purposes byother Morgan Stanley branded companies. Throughout this policy, we refer to the non-public information that personally identifiesyou or your accounts as “personal information.’’

1. What Personal Information Do We Collect About You?We obtain personal information from applications and other forms you submit to us, from your dealings with us, from consumerreporting agencies, from our Web sites and from third parties and other sources.

For example:• We may collect information such as your name, address, e-mail address, telephone/fax numbers, assets, income and investment

objectives through subscription documents, applications and other forms you submit to us.

• We may obtain information about account balances, your use of account(s) and the types of products and services you prefer toreceive from us through your dealings and transactions with us and other sources.

• We may obtain information about your creditworthiness and credit history from consumer reporting agencies.

• We may collect background information from and through third-party vendors to verify representations you have made and tocomply with various regulatory requirements.

• If you interact with us through our public and private Web sites, we may collect information that you provide directly throughonline communications (such as an e-mail address). We may also collect information about your Internet service provider, yourdomain name, your computer’s operating system and Web browser, your use of our Web sites and your product and servicepreferences, through the use of “cookies.” Please consult the Terms of Use of these sites for more details.



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Privacy Notice (unaudited) (cont’d)

2. When Do We Disclose Personal Information We Collect About You?We may disclose personal information we collect about you to other Morgan Stanley companies and to non-affiliated third parties.

a. Information We Disclose to Other Morgan Stanley Companies. We may disclose personal information to other MorganStanley companies for a variety of reasons, including to manage your account(s) effectively, to service and process yourtransactions, to let you know about products and services offered by us and other Morgan Stanley companies, to manage ourbusiness, and as otherwise required or permitted by law. Offers for products and services from other Morgan Stanley companiesare developed under conditions designed to safeguard your personal information.

b. Information We Disclose to Non-affiliated Third Parties. We do not disclose personal information that we collect about youto non-affiliated third parties except to those who provide marketing services on our behalf, to financial institutions with whomwe have joint marketing agreements, and as otherwise required or permitted by law. For example, we may disclose personalinformation to non-affiliated third parties for servicing and processing transactions, to offer our own products and services, toprotect against fraud, for institutional risk control, to respond to judicial process or to perform services on our behalf. When weshare personal information with a non-affiliated third party, they are required to limit their use of personal information to theparticular purpose for which it was shared and they are not allowed to share personal information with others except to fulfill thatlimited purpose or as may be permitted or required by law.

3. How Do We Protect the Security and Confidentiality of Personal Information We Collect About You?We maintain physical, electronic and procedural security measures to help safeguard the personal information we collect about you.We have internal policies governing the proper handling of client information. Third parties that provide support or marketingservices on our behalf may also receive personal information, and we require them to adhere to confidentiality standards with respectto such information.

4. How Can You Limit the Sharing Of Certain Types Of Personal Information With Other MorganStanley Companies?We offer you choices as to whether we share with other Morgan Stanley companies the personal information that was collected todetermine your eligibility for products and services you request (“eligibility information”). Eligibility information does not includeyour identification information or personal information pertaining to our transactions or experiences with you. Please note that, evenif you direct us not to share eligibility information with other Morgan Stanley companies (“opt-out”), we may still share personalinformation, including eligibility information, with those companies in circumstances excluded from the opt-out under applicable law,such as to process transactions or to service your account.



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5. How Can You Limit the Use of Certain Types Of Personal Information By Other Morgan StanleyCompanies for Marketing?By following the opt-out instructions in Section 6 below, you may limit other Morgan Stanley branded companies from marketingtheir products or services to you based on personal information we disclose to them. This information may include, for example, yourincome and account history with us. Please note that, even if you choose to limit Other Morgan Stanley Companies from usingpersonal information about you that we may share with them for marketing their products and services to you, Other Morgan StanleyCompanies may use your personal information that they obtain from us to market to you in circumstances permitted by law, such as ifthe Other Morgan Stanley Company has its own relationship with you.

6. How Can You Send Us An Opt-Out Instruction?If you wish to limit our sharing of eligibility information about you with other Morgan Stanley companies or other Morgan Stanleycompanies’ use of personal information for marketing purposes, as described in this notice, you may do so by:

• Calling us at (800) 231-2608Monday-Friday between 8a.m. and 6p.m.(EST)

• Writing to us at the following address:

Computershare Trust Company, N.A.c/o Privacy CoordinatorP.O. Box 30170College Station, Texas 77842

Your written request should include your name, address, telephone number and account number(s) to which the opt-out applies andwhether you are opting out with respect to sharing of eligibility information (Section 4 above), or if information used for Marketing(Section 5 above) or both. Written opt-out requests should not be sent with any other correspondence. In order to process yourrequest, we require that the request be provided by you directly and not through a third party.

Your opt-out preference will remain in effect with respect to this policy (as it may be amended) until you notify us otherwise. If youhave a joint account, your direction for us not to share this information with other Morgan Stanley companies and for those otherMorgan Stanley companies not to use your personal information for marketing will be applied to all account holders on that account.Please understand that if you limit our sharing or our affiliated companies’ use of personal information, you and any joint accountholder(s) may not receive information about Morgan Stanley products and services, including products or services that could help youmanage your financial resources and achieve your investment objectives.



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7. What If An Affiliated Company Becomes a Non-affiliated Third Party?If, at any time in the future, an affiliated company becomes a non-affiliated third party, further disclosures of personal informationmade to the former affiliated company will be limited to those described in Section 2(b) above relating to non-affiliated third parties.If you elected under Section 6 to limit disclosures we make to affiliated companies, or use of personal information by affiliatedcompanies, your election will not apply to use by any former affiliated company of your personal information in their possession onceit becomes a non-affiliated third party.

SPECIAL NOTICE TO RESIDENTS OF VERMONTThe following section supplements our policy with respect to our individual clients who have a Vermont address and

supersedes anything to the contrary in the above policy with respect to those clients only.

The state of Vermont requires financial institutions to obtain your consent prior to sharing personal information that they collectabout you with affiliated companies and non-affiliated third parties other than in certain limited circumstances. Except aspermitted by law, we will not share personal information we collect about you with non-affiliated third parties or other MorganStanley companies unless you provide us with your written consent to share such information (“opt-in”).

If you wish to receive offers for investment products and services offered by or through other Morgan Stanley companies, pleasenotify us in writing at the following address:

Computershare Trust Company, N.A.c/o Privacy CoordinatorP.O. Box 30170College Station, Texas 77842

Your authorization should include your name, address, telephone number and account number(s) to which the opt-in applies andshould not be sent with any other correspondence. In order to process your authorization, we require that the authorization beprovided by you directly and not through a third party.

SPECIAL NOTICE TO RESIDENTS OF CALIFORNIAThe following section supplements our policy with respect to our individual clients who have a California address and

supersedes anything to the contrary in the above policy with respect to those clients only.

In response to a California law, if your account has a California home address, your personal information will not be disclosed tonon-affiliated third parties except as permitted by applicable California law, and we will limit sharing such information with ouraffiliates to comply with California privacy laws that apply to us.



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