At least three private sector insurers made the request after recent interest rate volatility forced them to set aside additional cash, tightening liquidity. | Photo credit: iStockphoto
At least three private sector insurers have asked their bank counterparties to accept government bonds – assets they already hold in large quantities – instead of demanding cash collateral, people familiar with the developments said. Currently, insurers must book cash as margin for these deals, and the rules are set by individual banks, not regulators.
Yield peak pressure
The requests were made during recent conversations between senior executives from insurance companies and banks, the people said, asking not to be named discussing private matters. Discussions are ongoing and it is not certain that the banks will respond to the requests.
The discussions come after a period of rising local yields hurt bond valuations and forced insurers to set aside more money. In August, Indian 10-year bond yields rose as much as 35 basis points – the worst sell-off in three years – on concerns about fiscal pressures and a cautious stance from central banks. That took traders by surprise, prompting some fund houses to reduce exposure to local debt.
Collateral valuation issues
Insurers have become major players in the Indian debt market, and allowing bonds as collateral can help ease financing pressure during turbulent periods.
A potential hurdle for banks is how to value the bonds offered as collateral, especially when prices fall, two people said.
The debt market is under pressure
Still, the discussions highlight the challenges long-term investors face in India’s debt market, where the glut of bonds and limited scope for monetary easing continue to pressure yields.
In recent years, insurers have increased their use of bond derivatives to lock in interest rates as demand for products with guaranteed returns grew. Their steady purchasing helped anchor long-term borrowing costs in the economy. So far this year, the total notional amount of such transactions stands at 1.2 trillion rupees ($13.6 billion), up from 942.9 billion in 2024, according to clearing house data.
“Rising rates could lead to valuation losses on FRA (forward rate agreement) positions,” EY India analysts wrote in a July note, referring to the bond derivatives transactions. That could reduce capital and hurt solvency margins, they wrote.
More stories like this are available at bloomberg.com
Published on November 17, 2025
#Indian #insurers #urging #banks #accept #government #bonds #collateral #derivatives #trading