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India’s $1 trillion sovereign bond market sees rising clout of insurers


by Subhdeep Sarkar, India’s $1 trillion sovereign bond market is significantly shifting as a result of the country’s rising wealth.


Through life insurers, provident funds, and pension funds, their savings are transforming into long-term debt, resulting in a structural shift in the government of Prime Minister Narendra Modi’s borrowing costs.


According to HDFC Life Insurance Ltd., market participants are asking the central bank to sell more long-term bonds as insurers and pension funds broke 10- to 40-year debt. As a result, India’s yield curve appears to have flattened. Because of His expanding influence, the state will eventually become less dependent on banks and businesspeople will have fewer concerns about how Modi’s infrastructure-building spree will be funded.


Badrish Kulhali, HDFC Life’s head of fixed income, stated, “Insurance companies have been one of the major investors in long-maturity bonds.” We anticipate that traditional product sales and the need for longer-maturity bonds will continue to rise as distribution channels become more widely used.



According to data from the finance ministry, the shift has been gradual, with insurers holding 26% of government bonds at the end of December, up from 22% in 2010. Due to the widespread use of derivatives trading, which is estimated to be worth $19 billion and conceals purchases, some estimates suggest that their presence may be underestimated.

Be that as it may, their rising weight was reflected in the new bond barters in the monetary year finishing Walk, where longer-term obligation was valued lower than more limited development paper. The gap between the two-year benchmark and the 10-year benchmark has almost disappeared for the first time since 2017.


Surprising market heavyweights, the 14.2 trillion rupee ($172 billion) lending program went off without a hitch and without the backing of the central bank.


The underwriters diverted money from provincial bonds as well.



Modi’s government will borrow a record 15.4 trillion rupees in the new fiscal year, so this is likely to please him. In order to finance an ambitious nation-building plan that will include 50 new airports, heliports, and airports, New Delhi needs to find additional long-term investors for its bonds.

In her February budget, Finance Minister Nirmala Sitharaman said that the government has identified 100 new projects for so-called last-mile connectivity. She also suggested increasing capital expenditure by more than a third to Rs 10 trillion.


India is expected to become the sixth largest insurance market by 2032, according to a January report from Swiss Re, a global reinsurer. It is one of the insurance markets that is growing at the fastest rate in the world. In nominal local currency terms, total insurance premiums will rise by 14% annually over the next decade.

chartAnother area that has been helped by an increase in financial sophistication is the size of pension funds. The Public Benefits Framework, or NPS, has seen a 18% extension in resources under administration this financial to Rs 8.5 trillion till February.


Madhavi Arora, principal economist at MK Global Financial Services, referred to the pension and provident fund corpus as “the new incremental levers of government bond demand.” The fact that they are duration-hungry and unconcerned about a flat yield curve is the main point.

The flourishing bond-forward rate agreements derivatives trade between banks and insurers was one factor driving the demand for long-term loans over the past few years. With the help of the strategy, insurance companies were able to produce products with guaranteed returns and long-term yields without having a lot of debt on their balance sheets.


Bajaj Allianz Life Insurance Ltd.’s chief investment officer, Sampath Reddy, stated, “The last few years have seen high demand from insurance companies.

tax obstacle A tax on high-value insurance products, which targets a sector popular with wealthy investors and begins in April, is one of the potential obstacles. The impact must be monitored, according to some, such as ICICI Securities Primary Dealership Ltd and Star Union Dai-ichi Life Insurance Ltd.

Furthermore, investors should be wary of government borrowing given that Modi is financing one of Asia’s largest budget deficits through debt markets.


“There is a need to monitor the evolving demand-supply dynamics for the longer end of the yield curve with fresh inflows in the new financial year,” Star Union Dai-ichi Life Insurance Senior Vice President Ram Kamal Samant stated. This will determine the future shape of the yield curve as we enter the final phase of the rate hike cycle.

However, India’s status as the world’s fastest-growing major economy is likely to deepen its financial markets beyond the current fiscal year, bolstering the insurance companies and pension funds there. Additionally, the long end of the bond market is where that money is already set up.

“Insurance is gradually becoming a major player,” MK Arora stated.



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