As India derivatives demand surges, Singapore benefits

After long failing to act on foreign investor complaints, policymakers find themselves in an ironic bind: As global interest in derivatives surges, it is Singapore, not Mumbai, that is reaping the benefits.

In a turnaround from past years, more stock futures and options based on the Nifty are traded in Singapore than India. Billions of dollars in rupee derivatives traded from the city state nearly equal the amount of spot currency traded in India. Deals in Indian debt derivatives are close to volumes in Indian markets.

The swing shows how deeply a tax gaff last year damaged foreign investor sentiments and the cost to an economy that has seen growth tumble to around 5.5% following the sharpest slowdown in a decade.

In the absence of big changes, particularly on tax, it will be difficult for India to attract the investment back when competing with an established international financial centre like Singapore, said fund manager Samir Arora. "There is one big advantage of being here," Arora, of Helios Capital Management, said. "You need investors, and investors pass through Singapore more than they pass through Mumbai."

Investors have long complained of high taxes on portfolio investment, excessive caution towards derivatives and a poor track record in setting up new markets.

But India is now paying the price for poorly written rules last year aimed at ensnaring tax evaders, ironically including those routing investments through Singapore, which instead sparked outcry among foreign investors and an outflow of funds.

Finance minister P Chidambaram, who met foreign investors in Asia and Europe last month, has vowed action to prevent the offshoring of Indian derivatives, although few expect significant announcements in a budget on Thursday to counter the trend.

He pledged in a speech in Mumbai this month to "find ways and means to bring the options markets back to India, or at least a substantial portion of options market back to India." Finding those ways and means may be easier said than done.

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