In a significant development for India’s bond market, Kotak Life Insurance and JP Morgan India successfully executed the country’s first bond forwards on May 5, 2025. This milestone was made possible after the Reserve Bank of India (RBI) permitted bond forwards in government securities from May 1, 2025. The introduction of bond forwards is expected to enhance the country’s bond market infrastructure and provide institutional players, such as insurance companies and mutual funds, with a more effective tool to hedge their positions.
The first bond forwards deal involved Kotak Life Insurance purchasing a 40-year government securities bond forward worth Rs 20 crore from JP Morgan. According to Mahesh Balasubramanian, managing director at Kotak Life Insurance, bond forwards offer a more robust framework for hedging compared to forward rate agreements (FRAs). With bond forwards, the seller is contractually obligated to deliver the bonds at a future date, providing insurance companies with a more effective way to manage interest rate risk.
Bond forwards can help insurance companies lock in current yields and protect against potential interest rate declines. For instance, if an insurance company expects interest rates to fall, it can enter into a contract to buy a specific bond at a future date. This development is expected to enhance the risk management capabilities of insurance companies and provide them with a more effective tool to manage interest rate risk.
The introduction of bond forwards also offers an advantage over FRAs, as they involve the physical delivery of bonds and allow for cash settlement in some cases. Market participants believe that bond forwards may eventually replace FRAs due to their added flexibility and potential for more comprehensive risk management. However, the market is currently adopting a wait-and-watch approach, with volumes expected to pick up once market players modify their contracts to accommodate the physical delivery of bonds.
The Indian bond market is expected to gradually increase, driven by a rising demand from insurance companies. However, the market primarily functions as an investment market, rather than a trading market, with state-run banks, insurance companies, and pension funds typically adopting a buy-and-hold strategy. To boost volumes, a shift in the mindset towards trading and active participation is necessary. Despite regulatory changes capping insurance premiums, the volume of bond forwards is expected to increase, driven by the need for insurance companies to effectively manage interest rate risk.