LIC's entry into bond FRA market likely to boost long-term G-Secs

With deals across 10 major banks, the insurer's move is expected to spur demand for long-term government securities while narrowing forward spreads for other players

State-owned Life Insurance Corporation of India (LIC) has entered the forward rate agreements (FRAs) market through deals with 10 major banks, both domestic and foreign.

 

Market participants said LIC’s entry into the bond FRA segment is likely to spur demand for long-term government securities. But it may narrow forward spreads, thereby impacting profitability of other market players.

 

“We have deepened our exposure in the quarter (Q1FY26) to FRAs. We have crossed more than 10 banks, including Indian banks. For the time being, we will continue with FRAs,” LIC’s management said in a post-earnings’ call last week.

 

The insurer added that it will soon start doing bond forwards.

 

“Bond forwards is an ongoing thing, and as soon as the Clearing Corporation of India Ltd (CCIL) platform is set up, we will be entering that. We will move forward to bond forwards shortly,” the management said.

 

Bond FRAs enable insurance companies to lock in future interest rates on government bonds. This helps them hedge against the risk of falling interest rates that could affect their long-term liabilities, particularly non-participating insurance policies.

 

With LIC increasing the share of non-par products in its portfolio to improve margins, it now needs to hedge this portfolio against interest rate volatility to ensure stable returns for policyholders.

 

While private sector insurers have been active in the bond FRA market for hedging their non-par portfolios, LIC had previously stayed away from it.

 

“It (LIC) had been doing some test deals since November 2024, but formally entered the market in the previous quarter (April–June FY26),” said a market participant. “We have seen some pick-up in demand for securities of longer maturities — 30 years and above — since then,” he added.

 

Since May 2025, LIC’s footprint in the bond derivatives market has increased significantly. It now accounts for more than 39 per cent of the total $2.6 billion in FRA volumes during the period, according to data from CCIL.

 

“This will indeed lead to an increase in demand for longer-dated government securities,” said another market participant. He added that given the size of LIC’s volumes, forward spreads might narrow, impacting the books of smaller players.

 

In a bond FRA deal, insurance companies commit to buying a bond at a predetermined price on a future date, while banks take on the risk of price fluctuations in exchange for a premium.

 

Banks often hedge this exposure by purchasing long-term bonds aligned with the contract’s terms.

 

Unlike FRAs, which involve no physical delivery of securities, bond forwards allow an insurance company to take direct delivery of bonds for hedging purposes.

 

Reserve Bank of India (RBI) Governor Sanjay Malhotra had announced bond forwards in the February monetary policy.

 

This was part of an initiative to expand the range of interest rate derivative products available to market participants for managing interest rate risks.

 

Subsequently, in March this year, the insurance regulator permitted insurance companies to undertake forward trading in bonds (bond forwards) for hedging interest rate risks.

 

Previously, insurance companies were allowed to use FRAs, interest rate swaps, and exchange-traded interest rate futures for this purpose. Generally, when an FRA is settled, the settlement is in cash, determined by the difference between the contracted yield and the market yield.

 

However, the insurer also has to procure the bond from the market to satisfy its hedging requirements.

 

In case of bond forwards, instead of a cash settlement, the bank delivers the bond on the maturity date at the specified contracted yield. This reduces settlement risks for insurers, as they no longer face the challenge of sourcing the bond from the market at contract maturity. 

LIC’s big bet 

LIC has entered the bond FRA market iva deals with 10 banks 

Insurer accounted for 39% of total $2.6 billion in FRA volumes during Q1 

LIC has said it will soon start doing bond forwards 

Given LIC’s volumes, forward spreads might narrow, impacting the books of smaller players