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MUMBAI, Oct 11 (Reuters) –
The demand for Indian authorities bonds from home insurance corporations may gradual within the second half of the yr, as a preferred hedging technique used by insurers turns into troublesome for lenders to execute.
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Insurers have been coming into into ahead fee agreements (FRA) with banks to lock in charges on long-dated Indian bonds for a future date in order that they’ll offer assured returns to policyholders.
Banks cost a margin from insurers and maintain the long-dated bonds on their steadiness sheet till the maturity of the FRAs.
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These insurer-lender FRAs have boosted demand for long-term authorities bonds prior to now few months. But analysts mentioned banks may now go gradual on providing such hedges as these trades have swelled their bond portfolios.
The demand for bonds will cut back not as a result of the demand from insurers will cut back, however as a result of the ability of banks to proceed to present hedges utilizing steadiness sheets will reasonable, mentioned Badrinivas NC, managing director, head of markets of South Asia at Citigroup.
“There is a limit to how much (of the bank’s) balance sheet can be used for some of these hedges,” Badrinivas mentioned.
The notional FRA quantum excellent for listed non-public insurance corporations stood at round 2-12% of their whole investments, as of the earlier monetary yr, in accordance to information from Emkay Global Financial Services.
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Alongside the dimensions constraints on the bond portfolio of banks, the change in liquidity situations will make banks much less keen to offer these hedges, a bond and fx dealer at a Mumbai-based state-run financial institution mentioned.
Shrinking differentials between short-term and long-term charges will immediate banks to cost increased margins to insurers, mentioned Avinash Singh, senior analysis analyst at Emkay Global Financial Services.
“Until recently, the wide gap in yields between shorter-maturity and longer-maturity … enabled the counterparty bank to offer attractive terms, as it was able to earn money on this spread between the two yields,” Singh mentioned.
“With the shorter-maturity yield curve seeing a material spike in the last 1-2 quarters, banks will charge their margin to insurers.”
As a outcome, increased margin charges will seemingly impression demand from insurers for these hedges. (Reporting by Nimesh Vora and Dharamraj Lalit Dhutia; Editing by Saumyadeb Chakrabarty)
