IFR Asia: Banking transactions at GIFT City reached close to US$90bn between April to June 2024. Akshay, are you seeing fundraising in non-dollar currencies such as the Japanese yen and Swiss franc become more attractive through GIFT City for Indian borrowers? What are the benefits? And with the Fed just starting to cut rates, will this trend change?
Akshay Kumar, BNP Paribas: Maybe I’ll just take a step back and talk about the overall fundraising ecosystem and how it has evolved over the last couple of years. Speaking specifically about the GIFT City ecosystem and looking at the bank’s balance sheets, the asset size has probably grown by more than tenfold over the last four or five years.
Over time more funding sources have become available to banks, so it’s become easier to tap into these liquidity sources and then use that to lend to corporate clients at more competitive rates as compared to other international financial centres. We are also seeing more and more non-banking finance companies set up shop here – so the overall funding ecosystem has substantially evolved.
Yes, we have seen a pick-up in demand for what we call the low-yield currencies, like the Japanese yen or the Swiss franc over the years. If you take the Swiss franc, the proxy for the interest rate there, which is a 10-year Swiss government bond yield, is less than 0.5%. In the case of the Japanese yen, the same 10-year bond yield is close to 1%. If you look at the dollar, the 10-year bond yield after rate cuts is at 4%. So there is a substantial gap between the absolute interest rate level that a corporate would pay if they were to borrow in Japanese yen or Swiss franc, which partly explains the demand pick-up for these currencies.
The second reason is the favourable tax treatment. If a corporate raises a bond in one of these currencies, the withholding tax is 9%. Because the withholding tax is calculated as a percentage of the coupon rate, the lower the coupon or the lower the absolute interest rate, the lower the amount of withholding tax levied. So overall, the combination of both of these factors makes it much cheaper for corporates to borrow in these currencies, which explains the pick-up.
Coming to the second part of your question on rate cuts: yes, we’ve seen the Fed commence the rate cut cycle. They cut rates by 50 basis points in September and are likely to follow it up by several more cuts over the next few policy meetings. But you have to understand that most economies or at least most developed economies are correlated to a certain extent.
This means that what’s happening in the US is also likely to be happening in other developed economies. In that sense, the Swiss National Bank was actually ahead of the Fed in cutting rates. They started cutting rates in March and they’ve cut cumulatively around 75 basis points so far this year across three meetings and they’re likely to cut even more.
Japan is struggling with a different problem after decades of disinflation. They are seeing a resurgence of inflation and there is this tendency to normalise policy after decades of ultra-loose monetary policy. But again the extent of normalisation might not be too stark. While we’ve seen an increase in interest rates in Japanese yen, it’s not likely to be massive increases going forward.
Given how interest rates have come down in the US, we are likely to see a pick-up in demand for US dollars. But in absolute terms, the demand for the low yielders like Swiss franc and Japanese yen is likely to continue.
IFR Asia: How is GIFT City becoming an important hub, especially for hedging? What should be done to create more liquidity for various debt products which are offered here?
Deepak Sood, Alpha Alternatives: In terms of hedging, RBI has taken significant steps to remove the basis between offshore hedging instruments, which is non-deliverable, versus deliverable. Most of the foreign and domestic banks have set up offices here in GIFT City and are actively quoting and trading in both markets. Hence the spread, the basis between these two markets, has completely gone off and is almost negligible.
This offers much more efficiency in terms of hedging, whether it is an ECB or a bond kind of issuance, which helps the issuers to decide in a much more efficient manner to hedge their interest rate or currency risk. Domestic banks or foreign banks with branches in India are in a position to quote offshore curves as well as onshore curves efficiently.
On the credit hedging part, CDS is the only instrument available that can be used to hedge the credit exposure as far as investors are concerned. Unfortunately, we haven’t seen significant traction in the onshore CDS market. Despite RBI taking all sorts of steps over the last 10 years, we have seen a couple of ceremonial trades. Other than that, there’s no significant traction there.
With the recent Sebi directive that allows mutual funds to quote both as buyers and sellers of protection that should bring in some liquidity in the onshore market. Similarly, as far as the offshore market is concerned and the IFSCA, their ability to use global market credit default swaps or even the indices, the IG or non-IG indices, should help in hedging these credit exposures.
A lot of offshore funds have set up their units here in IFSCA, so they can use those sophisticated derivative instruments in order to hedge their credit exposures.
My view on liquidity is slightly different. Yes, it is an essential part of the overall infrastructure. Funds who set up shop here in IFSCA need to trade in the secondary market in order to manage or churn their positions, so liquidity in the market is required. Though we talk about listing on exchanges, however, 90% of secondary volume is in the over-the-counter market.
The essential part of the OTC market is the broker or the intermediaries that are required. Singapore has got a thriving intermediary market. Most of the global brokers, whether you talk about ICAP, Compagnie Financiere Tradition or Tullett Prebon, all these big institutional brokers are there. Sooner or later, we’ll have a similar kind of environment here in the IFSCA.
One significant advantage that IFSCA has over Singapore and some of the other markets is the time zone. By the time the Asian market or Singapore market closes, the UK or European markets would have just opened and the US market wouldn’t have even opened. India or IFSC GIFT City is positioned in a very strategic manner as far as the time zone is concerned.
From here, Asian, European, as well as US markets can be addressed too. So from a liquidity perspective, we need to bring in more intermediaries that can provide services to the players.
IFR Asia: Sandip, what is GIFT City doing to increase liquidity in various debt products offered here, and what is being done to attract intermediaries like brokers to develop GIFT City as a vibrant financial hub?
Sandip Shah, GIFT City: When we started, six or seven years back, the journey was very traditional and vanilla, where only the lenders came in first, and then the platforms came in, like the exchanges and the market infrastructure institutions, and the business was largely a wholesale business.
Banks were largely providing lending to the Indian corporates, more for their foreign currency requirements. Eventually, they added trade finance, and then a couple of other verticals. But the interesting story in the last three or four years, is how the IFSC is slowly becoming a true gateway for inbound and outbound investments.
There are a couple of regulatory incidents, which will actually prove this. One, Indian corporates and investors have now got a platform through where they are able to access the international markets very efficiently. And secondly, foreign investors are now using the IFSC structure for investments or structuring a fund when they are investing in India.
Now, this never happened in 2016-17, and today we are talking of 30 banks running their offshore branches here. And the good part is, apart from the plain, vanilla lending and boring business, many of these foreign banks have actually obtained a foreign portfolio investor (FPI) licence as well to invest in India. So their investment divisions have also become part of the IFSC ecosystem.
So while foreign investors are becoming part of the IFSC ecosystem, banks are also trying to see how they become part of the exchange trading ecosystem in terms of trading various instruments.
The second very big community is the alternative investment funds set up in GIFT City. Initially, their only objective was to raise money from global investors and then invest back in India either through the FPI or the foreign direct investment route. But with the liquid markets on GIFT City’s exchange platform, the two new strategies which are now emerging is one, many of them are also hedging their India risk through the GIFT exchange platform, and secondly, we have also seen funds where they are actually using the GIFT IFSC platform to trade and invest into the global markets.
With capital market intermediaries like ViewTrade from the US, who were not present in India previously. The first time they entered India, they set up in GIFT City and are actually providing a trading platform to trade multiple global markets. This may be the first time that Indian investors have such easy access to global platforms.
Aside from the banking and the fund ecosystem, the third element basically is the insurers. It’s important that there are the right kind of fixed-income instruments that insurers can be invested in efficiently. There are 25-plus insurance firms including the large reinsurance firms who are looking to become part of the trading ecosystem both in India and within GIFT City.
IFR Asia: What are some emerging structures, Hetal, that you are seeing in ESG finance? How can we leverage the exchanges at GIFT City to expand the scope of ESG finance, keeping in mind the regulator's vision of GIFT City being a transition finance hub?
Hetal Kotak, IFSC: At IFSC, we’ve been setting up committees, working on them tirelessly, working with market intermediaries for over five years now, and we’ve contributed to each one of them.
We have seen a sustainability-linked bond by Adani to the first JSW infra-sustainability-linked bond, to superb structures like a co-borrower, borrower structure, and other innovative structures being listed here. We all learned along the way.
As to how this number has grown? It has grown not only because of the fiscal benefit, but because of what we provide, because of the ecosystem, because of the light-touch regulations. There are so many new products that can be delved into, like the infrastructure investment trusts (InvITs) and real estate investment trusts, which the regulators are working on. We are really betting on sovereign green bonds to pick up and take shape here.
And so many institutions, such as IREDA, PFC, REC, all these are very interesting organisations, just to see what financing opportunities can be provided and how the markets here can grow.
IFR Asia: On the market development part, Akshay, do you see Indian issuers continue to get a premium when they raise an ESG loan or a bond, especially with what's happening with the Fed rates? And are cross-currency swaps becoming attractive given the rupee’s low volatility?
Akshay Kumar, BNP Paribas: Sure. I think one of the panellists in the previous panel talked about the greenium, and how the greenium has either converged to non-green issuances or collapsed altogether. Yes, the premium has come down. That being said, there is a large enough pool of investors outside of India that are looking at investing in ESG-compliant issuances in addition to non-ESG-compliant issuances. Or there are ESG-dedicated funds that only invest in ESG-compliant papers. So the demand is there.
The second part of the equation is that, traditionally speaking, Indian borrowers have tended to favour fundraising through loans rather than offshore bonds, and that could be a function of many things. Typically, it’s easier to set up lines with banks. Traditionally speaking, they have had a longstanding relationship with banks, so it’s easier to tap into the loan market, while the offshore bond market is something that’s not been very actively tapped by Indian issuers.
The top-tier corporates, yes, they would be repeat issuers, but if you go to the mid-tier corporates or the small-tier corporates, they will not really actively tap the bond market. So there has been a dearth of issuers from India raising bonds outside of India creating a massive demand-supply mismatch, where there is significant demand for Indian paper, but not enough supply.
With all the problems that China has been facing over the last couple of years, the relative attractiveness of China paper vis-a-vis Indian papers has reduced, which also increases the relative popularity of Indian paper. So ESG or non-ESG, Indian issuers, at least at this stage, do command a premium compared to non-India issuers.
We have a lot of things going for us as far as the macroeconomics are concerned. The fastest-growing emerging markets economy in the world, a stable political landscape, inflation that is under control. There’s a long runway for us as far as growth is concerned, as far as stability is concerned, so I think that the demand premium will continue to be there, ESG or non-ESG.
Now, to the second part of your question, if you look at the Indian rupee, it’s been one of the most stable currencies in the world. Sharp moves on either side compared to the dollar has been very well controlled. That being said, when you look at foreign currency borrowings, these are typically for a longer tenor. It could be three years, five years, seven years, or even longer. We are talking about a 20-year issuance being in the market right now.
For these long issuances, the borrowers tend to hedge at least a part or all of the risk that they’re exposed to. And typically in a loan or a bond, there’s not just the foreign exchange risk, but the interest rate risk as well, if it’s a floating-rate loan or a bond.
The type of hedging instrument that they use is a function of their risk management framework; their understanding of the level of risk inherent in any product; and other trade-offs they are willing to live with by going for a cheaper instrument that might leave more risk open. It’s a function of all of these factors.
That being said, as far as the actual instruments available to them are concerned, the RBI has done a great job in widening the market as far as the instruments available to corporates are concerned. It could be plain vanilla instruments like cross-currency swaps, FX swaps, interest rate swaps, coupon swaps, or the slightly more exotic FX options, FX options with barriers and FX options with digitals.
Deepak mentioned an interesting point that the RBI allowed corporates to trade in the non-deliverable market a couple of years back. So now you have this entirely different non-deliverable market available to corporates as well to hedge their exposure, and depending upon the basis, if it’s cheaper to hedge a non-deliverable, corporates will use that avenue.
As far as instruments are concerned, there are many available, but the cross-currency swap is the simplest and most effective instrument because it enables a corporate to hedge all the risk. It’s a full hedge, a 100% hedge, which is why, as the ecosystem evolves, as corporates get more sophisticated, we might see a shift from these vanilla instruments towards the more exotic side of things.
But the large majority of the population will continue to use this because it’s effective and it gets the job done and it helps you to eliminate the entirety of the risk.
Sandip Shah, GIFT City: Just to add that another important development that has happened is the permission to the foreign banks to deal with offshore derivative instruments (ODIs). Foreign banks under the FPI route can actually issue ODIs from GIFT City. I think that’s a big move and a couple of foreign banks are in the process taking advantage of it. It has also got the relevant tax benefits, for the FPI as an investment happening from GIFT City.
IFR Asia: Deepak, when setting up fund structures in GIFT City, what are the hurdles? How easy is it to attract talent and set up a fund here?
Deepak Sood, Alpha Alternatives: In terms of setting up a fund, things have smoothened out a lot over the last couple of years. Setting up a fund here GIFT City has become much easier, simpler, and less time-consuming. Whether it’s an outward fund wherein domestic money is getting invested abroad or it’s an inward-looking fund wherein offshore money is being brought into India, the regulations have become much simpler. That can be seen in the growth of the number of funds getting registered here in India. Having said that, I believe that the next six to nine months are going to be very interesting. India’s inclusion in a lot of global indices will shed a lot of limelight on the country India. Most global fund managers will start allocating more money to India, whether they participate in sovereign bonds or they don’t, allocations towards India will go up.
Their reduction in exposure to China is another beneficial point, and sooner or later, investors will realise that India should be kept out of the emerging market allocation, same as China. China was seen as a separate asset class compared to the emerging markets as a whole. Most likely, in a couple of years’ time, India will also get a similar kind of status, attracting more and more flows.
From that perspective, I believe that GIFT City will attract more funds that get domiciled and registered here. Media reports about a Middle Eastern sovereign wealth fund and a couple of others looking to set up shop in India is a big achievement.
In terms of challenges, to some extent, attracting talent in GIFT City is a challenge. India’s financial capital is still considered to be Mumbai. If you ask a trader from Mumbai to move to Ahmedabad and GIFT City, yes, there would be challenges. However, over the last one year, we have seen significant improvements.
The quality of life, the infrastructure available and connectivity has improved significantly. Recent actions, which brought the lifestyle here on par with, I would say, the rest of India has also helped to some extent. Last night, I got the opportunity to visit the Garba celebration next to this building. I was amazed to see these kinds of festivities and enthusiasm. To some extent, it was difficult to believe that this place is 20 kilometres away from Ahmedabad. This certainly adds to the overall attractiveness of the lifestyle here. Over a period of time, talent attraction will improve significantly. Many global shops are being set up here, so there is going to be international talent also moving to GIFT City.
A fund manager in Singapore or in Dubai might consider moving to GIFT City because the quality of life is on par with other cities, or the proximity to India or better proximity to markets.
Yet the challenge is in terms of individual taxation. Singapore and Dubai are much more efficient from an individual taxation perspective. The lower cost of living here in GIFT City compared to those cities, compensates to some extent. I believe, over a period of time, we will overcome this particular aspect also.
There is absolutely no complaints as far as the registration or setting up of offices. GIFT City will become a full-fledged financial centre in the next couple of years.
Sandip Shah, GIFT City: And the entities enjoying the 10-year income tax holiday are expected to pass on the benefit to their employees as well.
IFR Asia: Sandip, right now there are so many tax advantages and benefits for opening up units here. What needs to be done to ensure the long-term success of GIFT City?
Sandip Shah, GIFT City: One is the certainty of the tax. I think what the investors and the institutions have realised is that because the tax benefits GIFT City provides have been incorporated as a part of the Income Tax Act, there has not been any kind of ambiguity in terms of interpretation.
The second important aspect is the creation of an ecosystem. Banks need an entire ecosystem. When you ask Deepak about setting up a fund here, he will also need a trustee, a custodian, a legal firm and an accounting firm. I think what we are now creating is the larger ecosystem where one entity can work closely with five other service providers.
What we are creating right now is the strong ecosystem, which will go a long way because despite the tax benefits for business entities lasting 10 years, that ecosystem will continue to drive the growth of the financial centre.
The third element is the enablers or sweeteners that the government of India has provided. Previously, an FPI investing from overseas markets couldn’t comprise more than 50% of non-resident Indian (NRI) money. Now, for the first time, GIFT is the only location under which FPIs can bring 100% NRI money.
The other aspect is basically that the withholding tax is at a reduced rate when the lending happens from the GIFT ecosystem. These benefits will also drive the larger participation in the GIFT ecosystem.
IFR Asia: Keeping to the long-term vision of GIFT City, Hetal, what is the long-term outlook for the exchanges in GIFT City when the tax incentives expire, and how will GIFT City continue to attract issuers to list their bonds on the exchanges?
Hetal Kotak, IFSC: Any new jurisdiction to evolve needs fiscal incentives and for that adequate boost has been provided by the relevant authorities. We have witnessed this all over the world. However, would it have succeeded, and would we be seeing this day if the ecosystem and infrastructure had not provided support? Fiscal incentives alone are not a reason for growth of the jurisdiction.
We are at a stage where we don’t need to convince people about the potential of GIFT and growth story, with the ecosystem and fantastic ancillary services. Indian issuers will not shy away from making it the destination of choice to not only list but also raise funds from GIFT IFSC.
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