LIC to invest in fixed deposits on rate spike

The Life Insurance Corporation of India (LIC) has taken a fancy for fixed deposits, which is not a traditional investment avenue for the life insurer. LIC has not been a buyer of government bonds in recent days when the yields rose sharply on heavy selling by banks to tide over acute liquidity tightness caused by tax outflows, liquidity absorptions by the Reserve Bank of India (RBI) through bond auctions and increased pre-emptions via cash reserve ratio (CRR).

Around 8 per cent return on government bonds compare poorly to 10-12 per cent returns offered by upto one-year deposits and long-term bond issues by banks for capital adequacy purposes.

"We are not significantly buying government bonds as there are other alternative avenues such as tier II bonds of banks and short-term fixed deposits which are more attractive," a senior LIC official said.

"Throughout the year, banks have been approaching us to meet their capital adequacy norms. A lot of banks have approached us and we have sanctioned a proposal to buy more than Rs 500 crore of tier II bonds," the official said.

"Fixed deposits are not a regular investment instrument for us. But whenever the rates are attractive, we invest. From January onwards the rates have become attractive. At present, we have invested in 3-9 months deposits which are offering us more than 11 per cent rate."

LIC's gross investment for the year ending March 31 is expected to be Rs 80,000 crore. As per Irda norms, LIC invests 50 per cent in government securities, 15 per cent in infrastructure, more than 15 per cent in approved investments, below 15 per cent in other than approved investments.