India’s insurance sector is preparing to adopt bond forward contracts for a major portion of its interest rate derivatives exposure, with an estimated ₹3.5 trillion (approximately US$41 billion) expected to transition from existing forward rate agreements (FRAs).
This development marks a strategic shift aimed at improving risk management practices and market depth in the country’s sovereign debt landscape.
Sources familiar with the discussions told Bloomberg that several insurers are coordinating with regulatory authorities, including the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority of India (IRDAI), to initiate the conversion process.
The transition is expected to proceed gradually, as firms navigate the complexities of documentation and the regulatory handling of current contracts.
Bond forwards, which permit the purchase or sale of debt securities at a predetermined future date and price, differ from FRAs in that they result in the actual delivery of securities rather than just a cash settlement. This distinction is seen as beneficial for insurers, who require stable, long-duration assets to align with their liability profiles.
According to Churchil Bhatt, executive vice president for investments at Kotak Mahindra Life Insurance, the preference for bond forwards is likely to increase because they serve as both a hedge against rate volatility and a mechanism to obtain the underlying bonds, supporting long-term investment goals.
RBI guidelines allow banks to take unrestricted long positions in bond forwards, while short positions must be hedged. The introduction of these instruments is expected to support institutional demand for long-term government securities, particularly among insurers managing growing portfolios amid rising financial market participation.
Meanwhile, broader reforms in India’s insurance sector continue. In the Union Budget 2025-26, the government raised the foreign direct investment (FDI) ceiling for insurance companies from 74% to 100%, subject to the condition that premium income remains within the domestic economy.
Finance Minister Nirmala Sitharaman noted the government’s intention to simplify the existing investment regulations.
“This enhanced limit will be available for those companies which invest the entire premium in India. The current guardrails and conditionalities associated with foreign investment will be reviewed and simplified,” she said.
The FDI policy update aims to attract greater foreign interest in India’s insurance market and enhance capital availability for expanding operations.
In a related effort to improve investment tools, Indian insurers approached the IRDAI in January, seeking approval to use equity options for managing portfolio risk.
Presently, insurance companies face limitations on using derivatives for equity exposure, in contrast to mutual funds, which already have such capabilities.
Industry representatives proposed that access to equity options initially be restricted to benchmark index-linked products, with possible expansion over time.
This proposal responds to recent equity market volatility and the potential impact on insurers’ solvency ratios – a key indicator of their ability to meet policyholder obligations.
