Government to conduct debt switch mostly with insurers

By Suvashree Dey Choudhury

MUMBAI (Reuters) - India may conduct its 500-billion-rupee debt switch programme mostly with buy-and-hold insurance companies, a Reserve Bank of India (RBI) official said on Wednesday, potentially helping take pressure off the country's bond markets.

Under a debt switch programme unveiled in the 2013/14 budget, India plans to buy short-dated debt, and in turn sell longer-dated bonds, in an effort to spread out redemptions of debt to later years.

However, investors worry the new supply of longer-dated debt would hit bond prices. Banks would probably be the most affected, since they are the main buyers of government debt.

RBI Deputy Governor H. R. Khan said the central bank was considering dealing directly with insurance companies, which are traditionally buy-and-hold investors and would not be as much affected by falls in bond prices.

"A large number of long-tenure bonds are held by insurance companies," Khan told analysts in a conference call on Wednesday. "So they will be the ones who will be switching, and not the banks so much."

Reuters reported last week that India is likely to make the debt switch very soon, perhaps in the second half of the fiscal year ending in March.

On the conference call, which followed an RBI policy review in which the central bank unexpectedly kept interest rates on hold, Governor Raghuram Rajan added the aim of the debt switch would be to cause little disruption to bond markets.

"It will be investors who have the same maturity appetite who would redeem the bonds and take up the new bonds," Rajan said.

Dealers said a debt switch with insurers could prove less disruptive to bond markets.

"For them (insurers), it will not be hard to buy long bonds and hold them, unlike banks, who have to mark to market," said a senior bond dealer at a foreign bank, who declined to be identified as he was authorised to talk to the media.

RBI officials also said the central bank would keep a cap on the funds banks can borrow via a central bank overnight funding window called the Liquidity Adjustment Facility (LAF).

The cap is now set at 0.5 percent of a bank's so-called net demand and time liabilities (NDTL), which are a broad gauge of deposits, and is intended to spur banks to raise money through other means, such as deposits.

"The curbs on overnight repo at 0.5 percent of NDTL will continue," said RBI Deputy Governor Urjit Patel.

(Editing by Rafael Nam and Clarence Fernandez)