Derivatives deals that have boosted demand for India’s sovereign debt billions of times come under threat from the proposed tax, adding pressure to a market struggling with record sovereign debt.
Plans to tax high-value insurance contracts in New Delhi will reduce demand and encourage the industry to cut bond investments, analysts said. has increased the amount of debt purchased for
The deal will allow the insurer to secure future returns without expanding its balance sheet, with some estimates that the bank bought $19 billion in Treasury bonds. If that demand dwindles, pressure on the Reserve Bank of India to support the market could increase as Prime Minister Narendra Modi steps up the sale of government bonds. Buying of government bonds through trade could fall by 15% to 20% due to tax changes, said Ashish Baidia, finance chief at DBS Bank. in Bombay. The surge in government bonds “will create a demand deficit of Rs 2.5 trillion, which will require RBI intervention or inflows from real-money bond funds,” he said.
The deal, known as a bond forward rate agreement, has fueled strong demand for long-term bonds in recent months. His benchmark 5-year yield has risen more than 140 basis points over the past year, while the 30-year yield has risen only 39 basis points. According to HDFC Life Insurance Co., the interest rate deal works by allowing insurers to lock in the yield on long-term debt (usually 10- to 40-year bonds) for the next two to six years. This allows you to avoid the risk of interest rate fluctuations. Banks get funding costs and hedging spreads by purchasing debt.
According to ICICI Securities Primary Dealership Ltd. and Star Union Daiichi Life Insurance Company, the notional value of the bonds held by the bank offering the deal could be around 1.6 trillion rupees ($19 billion). Trading Continues to Rise He said traders will use cash for settlements in the final weeks before tax changes in April.
Ram Kamal Samanta, senior vice president of investment at Star Union Dai-ichi Life said: “Household taxes may reduce demand for traditional insurance products. Demand for FRAs may therefore cool with reduced hedging needs.”
As Modi aims to boost economic growth ahead of next year’s elections, the government plans for him to borrow 15.4 trillion rupees in his fiscal year starting April 1, which will Since this quarter he has increased by 8.4%.
Insurance demand has played a key role in keeping India’s bond yields in check in recent years, helping the government run one of Asia’s largest budget deficits.