LIC plans entering bond forward rate agreement market in FY25: Sources

State-owned insurer's entry expected to increase demand for instruments typically used to lock interest rates for a future date

State-owned Life Insurance Corporation of India (LIC) will enter the bond forward rate agreement (FRA) market by the end of FY25, seeking to ease risks in the non-participatory (non-par) segment, according to two sources.

 

FRAs are contracts between banks and insurance companies that enable insurers to lock interest rates for a future date and get protection from market volatility. By entering such agreements, insurers can offer guaranteed returns to policyholders.

 

“We have not undertaken trades yet in bond FRA, we are still in the process. But, we should mostly be ready and start trading by the end of this financial year,” said one source.

 

Siddhartha Mohanty, LIC’s managing director and chief executive officer, said during an earnings call earlier that the company had received policy approval for derivatives. 

 

‘Business Standard’ sent an email to LIC and is waiting for a response.

 

“This (LIC entering the market) will certainly boost the demand for longer-tenure bonds because if they are going to go into FRA, they are going to buy first the long bonds and then convert it into FRA. So somebody will buy it on their behalf and give them a product which is FRA,” said Vijay Sharma, senior executive vice-president at PNB Gilts.

 

LIC had total assets under management at Rs 53.59 trillion as on June 30, 2024, with government securities, including those issued by states, comprising 60 per cent of the total AUM (approximately Rs 30 trillion).

 

“They (LIC) are the largest player in the life insurance space, and their new focus on developing the non-participatory segment for which as risk mitigation they want to enter the bond FRA. They also have a large appetite, so if they enter the market, it will certainly boost demand,” said Ajit Banerjee, president and chief investment officer, Shriram Life Insurance Company. “Bond FRA is not limited to foreign banks, but some large private banks and public sector banks have entered the space.” 

 

The central government had introduced the 50-year tenor security in its borrowing calendar for the second half of the previous financial year, fulfilling a long-standing demand by life insurance companies, particularly the LIC. Before the introduction of the 50-year bond, the longest available government bond was the 40-year paper.

 

In the second half of FY25, the central government plans to borrow a gross amount of Rs. 6.61 trillion through its securities, with 15.9 per cent of the amount allocated to 40-year securities and 10.6 per cent to 50-year securities.