The Reserve Bank of India (RBI) has introduced the Separate Trading of Registered Interest and Principal of Securities (STRIPS) facility in state government bonds, a move that is expected to be a game-changer for insurance companies. STRIPS allows bond traders to separate and sell the principal and coupon payments of a bond separately, enabling insurers to manage their cash flows more effectively and align their investment income with future payouts to policyholders.
This facility is particularly significant for insurance companies, which have long-term liabilities and require stable cash flows to meet their policy obligations. By using STRIPS, insurers can sell near-term asset inflows and match their asset and liability cash flows more closely. This can help reduce reinvestment risk, which refers to the possibility of investors not being able to deploy proceeds from bonds at a desirable rate of interest.
STRIPS in state bonds offer a yield advantage of 30-40 basis points over STRIPS in central government securities (G-sec), making them attractive to long-term investors such as insurers, pension funds, and passive debt funds. The RBI has specified that all fixed-coupon bonds issued by state governments with a residual maturity of up to 14 years and a minimum outstanding of Rs1,000 crore are eligible for STRIPS.
The introduction of STRIPS in state government bonds is expected to increase transaction volumes and provide insurers with more flexibility in managing their investments. According to data, the face value of STRIPS trades in G-secs has risen to ₹2.47 lakh crore in FY25 from ₹38,383 crore pre-Covid in FY20. Insurers have seen higher demand for long-term products offering guaranteed returns, and the introduction of STRIPS in state bonds will help them deploy inflows in these products more effectively.
Overall, the RBI’s decision to allow STRIPS in state government bonds is a significant development for insurance companies, enabling them to better manage their cash flows, reduce reinvestment risk, and increase their investment returns. This move is expected to have a positive impact on the insurance industry and contribute to the growth of the bond market in India.