Insurers turn to govt bonds as a safe bet

Insurers looking at govt bonds as these are liquid investment options

Insurance companies are shying away from the corporate bond market in an environment where the Reserve Bank of India (RBI) surprised all with a repo rate rise in last month’s mid-quarter review of  monetary policy. Insurance companies are primarily looking at government bonds, as these are liquid investment options.

The Street expects the rate increase cycle to continue due to high inflation; hence, investing in government bonds will prove a safer bet. Since RBI tightened liquidity in mid-July to arrest the rupee’s volatility against the dollar, corporate bond issuances have dried and the cost of borrowing has risen. Issue arrangers are not expecting primary issuances of corporate bonds to pick up unless liquidity improves. Though RBI has partially eased liquidity, it has not done much to help the corporate bond market.

“Insurers are going for government securities so that they can book higher profits. In the current environment, there is a difficulty in supply of corporate bonds,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

After the repo rate rise, the yield on the 10-year government bond rose from 8.58 per cent to 8.71 per cent, while the yield on the Fixed Income Money Market and Derivatives Association of India’s 10-year ‘AAA’ public sector undertaking corporate bond rose from 9.66 per cent to 9.85 per cent. “The yield of government bonds and corporate bonds rises when interest rates move up. But at least insurers are safer in the case of government bonds,” said a corporate bond issue arranger. He added the trend of insurance firms shying away was expected to continue for some more months.

The cost of borrowing for companies has also gone up. Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance, said corporate bond issuances were being deferred by companies due to the rising yields. He added government securities’ rising yields had made fixed income instruments attractive for both insurers and customers. Corporate bond issuances had been limited to good papers like those of Rural Electrification Corporation; however, the yields had touched 9.8 per cent, said Pradhan.