Modi Push for Gujarat to Rival Singapore Spurs Derivatives

(Bloomberg) -- Prime Minister Narendra Modi’s dream for offshore financial hubs in India to rival Singapore and Hong Kong is attracting interest from currency-derivative designers.

Commercial banks operating in India’s international financial services centers -- the first of which will be Gift City in the province of Gujarat that Modi once governed -- will be allowed to offer structured products with prior approval from their board of directors, according to Reserve Bank of India rules issued Nov. 10. That looks set to allow banks that formerly focused on equity-linked securities to expand into foreign-currency contracts, according to Care Ratings. Ten banks have applied for Gift City licenses, with Yes Bank, ICICI Bank and IDBI Bank among those to receive branch approvals, it said.

“The introduction of these guidelines may pave the way for the emergence of structures with different underlyings such as currency,” said Mukund Upadhyay, manager at Care Ratings.

India’s expanding capital markets need to be able to transact a full range of products to satisfy demand in an economy growing at more than 7 percent annually, without upsetting the central bank’s control on a depreciating rupee. Modi is building the Gujarat International Finance Tec-City to take some share of the India-related investing and hedging activities from other Asian finance hubs. China is establishing a similar city called Qianhai in Shenzhen, where pilot policies can be tested before being rolled out nationally.

Modi is likely to unveil a 16-story tower at the city near the provincial capital of Ahmedabad in January, Press Trust of India reported last month. The former governor of Gujarat said his “dream” was to create the technology and infrastructure to support "modern India and to create a space in the global financial world,” according to the Gift City Web site.

As banking units in Gift City are supposed to primarily handle non-rupee business, there is an opportunity to offer foreign currency-linked investment or hedging products that may, for example, take directional bets on the U.S. dollar. This month alone, the rupee has declined 1.9 percent against the greenback. Over the past five years it is down 25 percent, even as the bond market opened wider to global investors and the central bank built up reserves.

Indian banks setting up units in Gift City are given tax breaks and can more easily offer foreign-currency loans and investments to Indian companies abroad, overseas nationals and foreign companies. Non-resident institutional clients will be the primary source of funds for bank units targeting increased sales of structured products, according to Vivek Sharma, Singapore-based head of asset management for Southeast Asia at Edelweiss Financial Services Ltd.

“Primary customers for these products should emerge as businesses both onshore and offshore which have a significant quantum of foreign-currency dealings with India," he said in a telephone interview. “Importers and exporters will clearly be a target segment for these products.”

There are currently no structured products linked to the currency in India, according to Care’s Uphadyay. About 93 percent of products are linked to the Nifty index with the remaining 7 percent tied to government securities and gold.

“Corporates trying to borrow in foreign currency and handle this position for import and export purposes will see a visible difference from this rule change,” said Mihir Sundhani, head of the structured solutions group at Reliance Capital Ltd.

To contact the reporter on this story: Viren Vaghela in Hong Kong at vvaghela1@bloomberg.net. To contact the editors responsible for this story: Richard Bedard at rbedard2@bloomberg.net, Sandy Hendry