India Expands Derivative Market Access for Foreign Investors

India has expanded the use of total return swaps (TRS), allowing major banks like HSBC and Standard Chartered to link these derivatives to corporate bonds. Previously limited to government securities, this move boosts foreign investors' access to India’s $639 billion credit market. With record corporate bond issuances and private credit growth, TRS offers investors exposure without needing local accounts. The regulatory body overseeing GIFT City is also exploring TRS for dollar-denominated bonds, further enhancing India’s appeal as a global financial hub.

India has taken a significant step to enhance the accessibility of its burgeoning credit market for global investors. According to a Bloomberg report citing insider sources, the country has widened the scope of a popular derivative instrument, enabling international banks to offer broader exposure to India’s $639 billion credit market.

The regulatory body overseeing the Gujarat International Finance Tec-City (GIFT City) has reportedly granted approval to major global banks, including HSBC Holdings Plc and Standard Chartered Plc, to provide total return swaps (TRS) linked to corporate bonds. Previously, these swaps were restricted to government securities. This move aligns with the robust growth in India’s credit market, where corporate bond issuances and the demand for high-yield private credit are reaching unprecedented levels.

A Growing Market for Corporate Debt

India’s corporate debt market is experiencing a surge, driven by record volumes of local currency bonds issued by domestic firms. Adding to this momentum, the private credit space has seen landmark deals, including the $3.4 billion funding secured by construction giant Shapoorji Pallonji Group—the largest private credit transaction in the nation’s history.

The expansion of TRS to corporate debt is expected to attract more foreign investors, as these instruments allow them to gain exposure to Indian assets without requiring a local account. By leveraging TRS, investors can earn returns from underlying assets while paying a fee to the counterparty, making it a convenient alternative to direct ownership. The growing popularity of such derivatives has been fueled by India’s inclusion in global bond indexes, which has already led to $22 billion in inflows into the country’s sovereign debt market.

Industry Leaders Voice Optimism

“There are many global investors who prefer to use the TRS route, and we’ve observed significant volume growth through our GIFT City branch,” said Sachin Shah, Managing Director at Standard Chartered India, in a statement to Bloomberg. His remarks highlight the increasing reliance on GIFT City as a hub for facilitating complex financial instruments.

At present, the approval for TRS is limited to rupee-denominated corporate debt.

However, discussions are underway to extend these derivatives to dollar-denominated bonds issued by companies operating within GIFT City. The International Financial Services Centres Authority (IFSCA), the regulatory body responsible for GIFT City, has indicated its willingness to explore this possibility further.

“We will soon be releasing a consultation paper on this matter,” K Rajaraman, Chairman of the IFSCA, revealed in an earlier interview with Bloomberg. This development underscores the regulator’s proactive approach in fostering innovation and accommodating the evolving needs of global financial markets.

A Strategic Move for Long-Term Growth

By expanding the use of total return swaps to corporate bonds, India is positioning itself as an attractive destination for foreign investments in credit markets. The initiative not only broadens access but also strengthens the role of GIFT City as a global financial hub. With the potential inclusion of dollar-denominated bonds in the near future, India is set to further solidify its position on the global financial stage, inviting deeper participation from international players.

This bold regulatory move marks another milestone in India’s journey toward integrating with global markets while leveraging its rapidly growing credit market for sustained economic development.