Singapore as India’s financial hub?

The world’s two fastest-growing economies, India and China, are clearly at different stages of development and make for unfair direct economic comparison. But parallels can be drawn. Since Prime Minister Narendra Modi came to power in 2014, his team was tasked with the job of plugging India’s deficit at a time when public funds were needed to finance critical infrastructure, with private companies being mired in debt. While he laid out an ambitious plan to liberalise India’s economy and develop ports and roads to attract capital and transform the nation into a manufacturing hub, restoring investor confidence would be less than easy. But India doesn’t have to go it alone.

China’s successful leverage on Hong Kong as a launch-pad to engage the international business community serves as a meaningful case study as India further opens up to foreign investment. What India needs is a partner. A collaborator to India, as Hong Kong is to China, and one that provides greater access to the international investor community. More importantly, one that allows India to better integrate into the global economy and could one day help position the rupee as an international currency.

Hong Kong’s role in propelling China and its currency into the global financial arena cannot be understated. As foreign money used Hong Kong as a viable platform to invest in China, the Chinese government used the city as a testing ground for financial reforms. Just as Hong Kong acted as a financial gateway to China, few countries with similar proximity to India can fill the same shoes. It will make sense for India to look further afield.

As an established international financial hub, Singapore stands out. The two governments have had a strong history of cooperation, and Singapore is India’s biggest trading partner in ASEAN and one of its largest investors.

Singapore can also support India’s smart cities development plan. The city-state’s recent decision to lead construction of a new capital city 10 times its own size for Andhra Pradesh highlights commitment and contribution to India’s rise and growth. Singapore’s open trade system and financial markets, coupled with incentives and a competitive tax regime, have already encouraged Indian companies to set up local operations and regional headquarters there.

Indian companies’ offshore treasury needs are also well served by Singapore’s foreign currency and interest rate hedging markets. Singapore is also a natural destination for Indian enterprises seeking to raise global capital. Companies such as Tata Group have sold Singapore dollar debt in the local market. In 2014, Tata’s global trading unit issued the first-ever perpetual bond in Singapore to raise S$150 million. This came after its successful S$50 million fixed-term bond issue in the city-state in 2013. In January of the same year, ICICI Bank-Dubai sold S$225 million bonds.

Here lies a natural progression toward an offshore rupee bond market in Singapore. The Reserve Bank earlier this year gave Indian companies the go-ahead to raise rupee bonds abroad in the local currency to be settled in US dollar. This would allow overseas Indians and strongly-rated Indian companies to repatriate foreign proceeds. Many overseas Indians already send money home and invest onshore for tax-free returns.

The city-state could play a key role should India decide to internationalize its currency. Allowing companies to sell offshore rupee debt can be seen as a first small step toward convertibility. A well-established international currency market, Singapore’s experience as a key offshore yuan market will be valuable in replicating the success for greater offshore use of rupee. As of June 2015, Singapore’s accumulation of 322 billion yuan deposits made it one of the three biggest yuan offshore centres. It is also among the top three cross-border yuan settlement hubs.

Singapore dollar bonds and US dollar debt issued by Indian companies have enjoyed much success in the city-state and many international banks base their trading of offshore India products in Singapore. This suggests that institutional and retail investors in Singapore understand the rupee risk and buy into the India Inc. story. It would make sense for India to one day consider allowing offshore rupee bonds listed in Singapore to be settled in rupee to reduce transactional costs. And when India considers a sovereign bond issue, a Singapore listing would provide access to a wider investor base and deeper capital pools.

As India and Singapore celebrate 50 years of diplomatic ties, we need to focus on extending these strong relations.

The writer is Regional CEO, ASEAN and South Asia, Standard Chartered Bank

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