Indian insurers gain clout in the $1 trillion bond market

Indian insurers gain clout in the $1 trillion bond market is undergoing a significant change as a result of its population’s increasing affluence.

Their savings, which are routed through life insurers, provident funds, and pension funds, are increasingly being invested in long-term debt, which is changing the structure of borrowing costs for Prime Minister Narendra Modi‘s administration.

According to HDFC Life Insurance Ltd., market participants are requesting the central bank sell more long-dated bonds as insurers and pension funds bought up 10- to 40-year debt, significantly flattening India’s yield curve. With their expanding presence, the state will gradually rely less on banks, all the while assuaging traders’ concerns about how Modi’s infrastructure-building binge will be financed.

“Among the major purchasers of long-maturity bonds have been insurance companies, says the head of fixed-income at HDFC Life, Badrish Kulhalli. “We anticipate that the expansion in sales of conventional products and, as a result, the demand for long-maturity bonds, will both continue to grow as distribution channels’ penetration and reach expand.”

According to figures from the finance ministry, insurers owned 26% of governmental bonds at the end of December, up from 22% in 2010. Due to the widespread usage of a derivatives market that, according to some estimates, is worth $19 billion and conceals purchases, its prevalence is probably understated.

The fiscal year that ends in March saw recent bond auctions where longer-dated debt was valued at lower rates than shorter-maturity paper, indicating their growing clout. For the first time since 2017, the difference between the benchmark 10-year rate and its two-year counterpart has nearly vanished.

Surprising market veterans, the borrowing program for 14.2 trillion rupees ($172 billion) was successful without the need for help from the central bank.

Insurance companies bought up all the bonds issued by provinces.

Modi would probably be pleased with it, as his government will borrow a record 15.4 trillion rupees in the upcoming fiscal year. In order to complete its ambitious nation-building plan, which will include 50 new airports, heliports, and aerodromes, New Delhi must find additional long-term investors for its bonds.

In her February budget, Finance Minister Nirmala Sitharaman suggested increasing capital investment by more than a third to 10 trillion rupees and stated that the government has identified 100 new projects for what is known as “last mile connectivity.”

According to a survey released in January by international reinsurer Swiss Re, India is one of the insurance markets with the fastest growth rates in the world and is expected to rank sixth in terms of size by 2032. According to it, during the next ten years, nominal local-currency total insurance premiums will increase by an average of 14% yearly.

Another sector that has benefited from the rise in financial sophistication is the size of pension funds. Assets under administration for the National Pension System, or NPS, increased this fiscal year by 18% to 8.5 trillion rupees as of February.

These are the new, more significant levers for increasing demand for government bonds, surpassing banks, “with reference to the pension and provident fund corpus, Madhavi Arora, lead economist at Emkay Global Financial Services, stated. The important thing is that they don’t care whether the yield curve is, let’s say, flat; they are looking for longevity.”

The bond-forward rate agreement, a booming derivative transaction between banks and insurers, was one of the factors influencing demand for longer-dated debt during the past few years. Without adding to their balance sheets with more debt, the technique allowed insurance firms to lock in longer-term yields for products that guaranteed returns.

“Insurance firms have made more requests over the past couple of years, “According to Sampath Reddy, a chief investment officer of Bajaj Allianz Life Insurance Ltd. “This is because consumers now choose subpar savings solutions with assured returns as the market has expanded.”

Yet, beyond the current fiscal year, India’s status as the world’s fastest-growing major economy is anticipated to develop its financial markets, filling the coffers of its insurers and pension funds. And the longer-dated end of the bond market is a ready-made home for that money.

According to Arora of Emkay, insurance has gradually risen to prominence.