LIC inks $1 billion in bond derivatives as hedging gains traction

LIC's FRA deals with Wall Street banks mark 38% of recent trades, as India's largest insurer adapts to market risk and rising bond demand amid equity losses

Life Insurance Corporation of India (LIC) has signed $1 billion worth of forward rate agreements (FRAs) with major Wall Street banks, marking a major push into bond derivatives.

 

The move reflects the insurer’s growing use of hedging tools as it looks to protect long-term returns amid rising market volatility and falling equity valuations.

 

What’s the latest

According to a Bloomberg report, LIC has entered into FRA contracts with JPMorgan Chase & Co. and Bank of America Corp, locking in future bond yields to guard against declining interest rates.

 

The $1 billion in FRA deals represents a sharp increase in LIC’s derivatives activity, accounting for 38 per cent of the $2.6 billion cleared in India since May.

 

 

Numbers game

LIC FRA deal value: $1 billion

Share of total FRA trades since May: 38 per cent

LIC asset base: $630 billion

Loss in equity portfolio (Jun 30–Jul 25): ₹46,000 crore

Portfolio value drop: ₹16.10 trillion → ₹15.64 trillion

Equity portfolio value gain since Apr low: ₹1.94 trillion

Nifty 50 index (Jul 25): 24,837

Sensex index (Jul 25): 81,463.09

 

What it means

LIC’s deepening foray into bond hedging marks a significant shift for India’s largest institutional investor, indicating that even state-backed entities are now actively mitigating interest rate risk.

 

As government bond auctions draw stronger demand and financial markets experience higher volatility, large investors like LIC are turning to derivatives to stabilise returns and manage risk exposures.

 

This also points to increasing sophistication in India’s financial risk management practices, especially among long-term asset holders.

 

Backstory

LIC began exploring bond derivatives in late 2024, initially executing small trades earlier this year. As market uncertainty grew, it gradually expanded its hedging strategy to include FRAs.

 

Forward rate agreements allow the insurer to lock in interest rates for future bond purchases, with banks assuming the price risk. This hedging mechanism offers a buffer against rate cuts, which can reduce bond yields and impact LIC’s long-term income streams.

 

LIC equity portfolio losses

At the same time, LIC has faced losses in its stock investments this month. As earlier reported by Business Standard, estimates show the market value of LIC’s equity portfolio declined by ₹46,000 crore between June 30 and July 25, 2025, as benchmark indices Nifty 50 and BSE Sensex fell 2.6 per cent to 24,837 and 81,463.09, respectively.

 

LIC’s 322-stock portfolio declined from ₹16.10 trillion to ₹15.64 trillion over that period. Still, the portfolio is ₹1.94 trillion higher than it was in early April, when markets hit their lowest point in a year.