Transcript: India’s quid pro quo trade strategy

This is an audio transcript of the FT News Briefing podcast episode: ‘India’s quid pro quo trade strategy’

Sonja Hutson
Good morning from the Financial Times. Today is Monday, March 25th, and this is your FT News Briefing.

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Japan and the US want their militaries to collaborate better. And the US corporate bond market is raking in money. Plus, India is offering more access to its markets, but it comes at a price for international companies. I’m Sonja Hutson and here’s the news you need to start your day.

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Sources tell the FT that the US and Japan are planning a massive upgrade to their security alliance. The two countries are trying to double down on protection against what they see as an increasing threat from China. The plan is to restructure the US military command in Japan to make co-operation easier. US President Joe Biden and Japan’s Prime Minister Fumio Kishida will announce the plan at the White House next month.

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A record amount of money has flooded into US corporate bond markets this year. Investors are trying to lock in some of the highest yields in years, but the strategy could be risky. Here to explain is the FT’s Harriet Clarfelt. Hi, Harriet.

Harriet Clarfelt
Hi.

Sonja Hutson
So why are investors putting so much money into the corporate bond market right now?

Harriet Clarfelt
So there are a few different reasons. Taking a step back, we, starting in March 2022, had this aggressive pace of interest rate rises from the US Federal Reserve. And that really put a stopper in corporate bond issuance. But coming into this year, the Fed gave its strongest signal yet that it was at the end of its interest rate rise campaign and was prepared to start cutting rates. And that drove a sort of broader rally across asset classes. And the credit market was swept up in that. So corporate bonds are just looking a lot more attractive to investors now than they were before. And they are still yielding a lot. And so a lot of investors are just trying to lock in these high yields they can still get now before yields start to fall and rate cuts happen.

Sonja Hutson
OK, Harriet, so that all sounds good for investors, but what are some of the risks here?

Harriet Clarfelt
So there is a concern out there that particularly for riskier companies, companies are finding it cheaper than it was to borrow money from investors. And that could potentially mask some sort of lingering concerns over the outlook for the US economy, which, you know, is still far from guaranteed. And then at some point, some people said to us, where we have an unexpected sort of not great piece of economic data or some sort of small sign that inflation or employment is heating back up, something that might sort of make the Fed and policymakers stop and think, is this really the right time to start cutting?

Sonja Hutson
OK. The risk here then is that people are so excited about US corporate bonds that even a small shift can have really big consequences.

Harriet Clarfelt
Yes, that is essentially it.

Sonja Hutson
Is there any way to avoid a scenario like that happening?

Harriet Clarfelt
Well, it is very difficult to say what would spark that scenario, really, because there has been a growing expectation that the US will achieve a soft landing, you know, avoid a recession while still managing to bring inflation under control. And I think in defence of the corporate bond market, some people would say, well, even at the lower end of the credit quality spectrum, within the corporate bond market, quality has improved over the last few years. And I should say that investment-grade borrowers are deemed unlikely to fall into distress or to default, you know, they have high-quality credit ratings. But it’s more of a concern for sort of the riskier borrowers out there in the bond market.

Sonja Hutson
Harriet Clarfelt is a capital markets correspondent for the FT. Thanks, Harriet.

Harriet Clarfelt
Thanks very much.

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Sonja Hutson
India recently signed a monumental free trade agreement with a group of European countries. The details of that deal say a lot about how India is approaching international trade now. Basically, if you wanna do business in India, you’ve got to give them something in return. Here to explain is the FT’s South Asia bureau chief, John Reed. Hi, John.

John Reed
Hi there.

Sonja Hutson
All right, John, let’s talk about this deal between India and the European Free Trade Association, that’s EFTA for short. What did India get in exchange for access to its market?

John Reed
Yeah. So in the EFTA agreement, India’s secured a pledge by these rich countries to invest up to $100bn and create 1mn jobs over 15 years. It’s quite an extraordinary figure and not immediately clear to any of us how and indeed whether this will be achieved. But it’s very unusual in the world of FTAs that one of the parties makes an undertaking that explicit.

Sonja Hutson
And, John, what does that agreement tell us about India’s new quid pro quo trade strategy?

John Reed
I don’t know if it’s a new trade strategy as much as a sort of growing realisation, both on the part of India and its trading partners, that it’s a rising economic power. And I think India is exercising its clout accordingly. In fact, what’s in it for us is words that Piyush Goyal, the commerce minister here, used, according to his interlocutors in EFTA, that India wanted some very clear quid pro quos in exchange for doing a trade deal with Switzerland, Norway, EFTA. I mean, these are very rich but also very mature economies that won’t have the same growth trajectory as India.

Sonja Hutson
So another part of this is the high tariffs that India imposes to protect its domestic companies. My understanding is that India will lower them to allow more foreign investment, but they also want some concessions in return for that. Can you give us an example of how that’s played out?

John Reed
There have been quite a few examples. In talks with Australia, India secured some concessions on visas for Indian students studying in Australia that they would be allowed to stay and work there for longer. We understand we’ve been told that India is pressing for similar visa concessions in its talks with the UK as well. Another example is Tesla. So India last week agreed to lower its tariff barriers for higher-priced imported electric vehicles for any company that will come in and invest in India. And these were designed very much with Tesla in mind. Tesla is looking at possibly building a factory in India that wants to be able to import some of its higher-priced EVs as it scales up. So India was willing to bend on this particular tariff barrier, but that doesn’t apply only to Tesla. We’ve also got VinFast, other EV producers coming in here. But in short, India’s showing it’s willing to bend if it gets something good in exchange.

Sonja Hutson
So would it be fair to say that India is kind of opening up as a way to modernise its industries and ultimately be more competitive?

John Reed
Absolutely. This is something that’s been in train since the 1990s, since India’s first wave of market reforms, when it opened up this famously protected economy for the first time. I think India, it does have a sort of a broad strategy of opening up to the world, of trying to create more competitive industries. But it’s also, I think, very mindful it’s gonna do it on its own terms. And they’ve made it very clear that they’re gonna negotiate very hard on these.

Sonja Hutson
John Reed is the FT’s South Asia bureau chief. Thanks, John.

John Reed
Thank you.

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Sonja Hutson
You can read more on all these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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