Derivative products on Indian bonds see strong global demand

As the deadline for inclusion of government bonds in a JPMorgan index nears, several overseas investors eager for exposure to Indian assets but without the necessary registrations have piled into a derivative product that may account for a substantial 30% share of the near-$10-billion flows into local debt over the past nine months.

Global players such as hedge funds have tapped into the global networks of foreign banks in India to avail of an Offshore Derivative Instrument (ODI) referred to as a Total Return Swap and gain much-desired exposure to rupee-denominated debt as the foreign flows push down local bond yields.

“We continue to see active interest from offshore investors in Indian Government Bonds both via direct access and TRS route. Our GIFT City branch has executed over $250 million of TRS in the last month itself across multiple investors and continues to engage new investors looking to access via this route,” said Anita Mishra, head of markets and securities services, HSBC India.

HSBC and Standard Chartered Bank are amongst the few banks to offer the product from the GIFT City. In March, ET had reported that HSBC, which started such trades in February, had carried out $75 million of transactions in around three weeks.

Standard Chartered Bank, which had launched the maiden ODI TRS from GIFT City in October last year, sees heavy activity in the space even outside of the Gandhinagar-based hub.”Of the total FPI investment of approximately $9.5 billion in IGBs since index inclusion announcement in Sep 2023, we estimate almost 25- 30% to have come through the TRS format. We expect TRS demand to remain robust over the next few months, as more and more investors evaluate investing in Indian debt market in the backdrop of index inclusion, positive demand supply dynamics, stable currency, and inflation,” said Parul Mittal Sinha, head – financial markets, India, Standard Chartered Bank.Inclusion of Indian bonds in the JP Morgan Emerging Market starts from June 28.”There is a segment of the fast money market participants such as hedge funds who have been showing active interest in the TRS product this year, largely because of the flows that have hit the market after JP Morgan’s announcement. We saw very strong interest in TRS in January, February, and March when foreign flows were particularly strong. After a lull in April, we saw a mixed picture in May and a pick-up in June ahead of the actual inclusion process,” said Vikas Jain, head of India trading, fixed-income, currencies and commodities, Bank of America.