Insurance companies are shying away from the corporate bond market in a scenario where the Reserve Bank of India (RBI) surprised the market with a repo rate hike in the mid-quarter review of the monetary policy earlier this month. Insurance companies are primarily looking at government bonds as they are atleast a liquid investment option.
The street expects that the rate hike cycle may continue due to high inflation. Hence investing in government bonds will prove to be a safer bet.
“The yield of government bonds as well as corporate bonds rises when interest rates move up. But at least in case of government bonds insurers are safer,” said a corporate bond issue arranger. He also added that this trend of insurance companies shying away is expected to continue for few more months due to which even corporate bond issuances have dried up.
Nirakar Pradhan, Chief Investment Officer of Future Generali India Life Insurance said that corporate bond issuances are being deferred by companies due to the rising yields. However, he added that government securities’ rising yields have made the fixed income instruments attractive for both the insurers and customers.
Pradhan explained that while corporate bond issuances have been limited, in good papers like that of Rural Electrification Corporation (REC), the yields have touched 9.8%.
Since the time the Reserve Bank of India (RBI) tightened liquidity in mid-July, corporate bond issuances have dried up as the cost of borrowing rose. Issue arrangers are not expecting primary issuances of corporate bonds to pick up unless liquidity improves.
Source: Business Standard
Date:28th September 2013