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Indian Insurers' Request to Government
Indian insurers have taken a significant step by asking the government to issue new sovereign debt instruments. This includes zero-coupon bonds, which could open up broader investment opportunities for them. According to people familiar with the matter, these insurers have made a request to the Reserve Bank of India. The RBI, in turn, has discussed the matter with the Finance Ministry. Zero-coupon bonds are seen as a way for insurance companies to better manage their long-term liabilities. As they increase their offerings of guaranteed savings products, these bonds can play a crucial role. India's bond market, which was traditionally dominated by banks, is now evolving. Cash-rich insurers are driving the demand for a wider variety of securities and derivatives. Insurance firms have specifically sought the issuance of 20- and 30-year zero-coupon bonds. This shows their confidence in the long-term potential of these instruments.However, the RBI and the finance ministry have not responded to Bloomberg's emails seeking comments. Zero-coupon bonds offer several advantages. They protect investors from interest-rate and reinvestment risks as they do not provide periodic payouts. Investors buy them at a discount and receive the full face value at maturity. Insurance companies have also asked the government to issue partly-paid bonds. In this debt instrument, the bond is partly bought by investors at issuance, and the remaining balance is purchased in installments over a pre-defined schedule. While the Separate Trading of Registered Interest and Principal of Securities (STRIPS) facility allows insurers to buy bonds with similar features to zero-coupon bonds, it involves intermediaries, which adds to costs.In recent years, the government has responded favorably to insurers' requests. For example, they introduced bonds of 50-year maturity. But issuing zero-coupon bonds could pose accounting challenges. Although these bonds would not add to the government's budget deficit during their tenure, repayment obligations would surge upon maturity, potentially inflating gross borrowings.READ MORE