At least three private-sector insurers have made the request after recent yield volatility forced them to set aside additional cash, tightening liquidity.
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Indian insurance companies are asking banks to ease collateral rules for bond-derivative trades after recent bouts of volatility forced some market participants to set aside more cash, straining liquidity.
At least three private sector insurers have asked their bank counter-parties to accept government bonds — assets they already hold in large amounts — instead of requiring cash collateral, according to people familiar with the developments. Currently, insurers must post cash as margin for these deals, and the rules are set by individual banks rather than regulators.
Yield spike pressure
The requests have been made during recent discussions between senior executives of insurance companies and banks, the people said, asking not to be named while discussing private matters. Talks are ongoing and it’s not certain that the banks will agree to the requests.
The discussions come after a period of rising local yields hurt bond valuations and forced insurers to set aside more cash. In August, India’s 10-year bond yield rose by as much as 35 basis points — the worst selloff in three years — due to concerns of fiscal strain and a cautious central bank stance. That took traders by surprise, prompting some fund houses to cut exposure to local debt.
Collateral valuation issues
Insurers have become major players in India’s debt market, and allowing bonds as collateral may help ease funding pressures during turbulent periods.
A potential hurdle for banks is how to value the bonds pledged as collateral, particularly when prices are falling, two people said.
Debt market strains
Still, the discussions highlight the challenges long-term investors face in India’s debt market, where large bond supply and limited room for monetary easing continue to pressure yields.
In recent years, insurers have stepped up their use of bond derivatives to lock in interest rates as demand grew for guaranteed-return products. Their steady purchasing helped anchor long-term borrowing costs in the economy. So far this year, the total notional amount of such trades stands at 1.2 trillion rupees ($13.6 billion), higher than 942.9 billion in 2024, according to clearing house data.
“Rising rates can lead to valuation losses on FRA (forward rate agreement) positions,” analysts from EY India wrote in a July note, referring to the bond derivative transactions. That could reduce capital and hurt solvency margins, they wrote.
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Published on November 17, 2025