By Mahesh Nayak
After persistent efforts and dialogues with the regulator to introduce bond forwards, Kotak Life Insurance and JP Morgan India successfully executed India’s first bond forwards on May 5, marking a significant step forward in enhancing the country’s bond market infrastructure.
The Reserve Bank of India (RBI) permitted bond forwards in government securities from May 1, 2025, allowing insurance companies, mutual funds, and other institutional players to help hedge their positions by buying bonds from banks and institutions.
The first bond forwards deal reported on CCIL involved Kotak Life Insurance purchasing 40-year, 7.34% 2064 government securities (G-Sec) bond forwards worth Rs 20 crore from JP Morgan for a tenure of more than 5 years and less than 7 years. Confirming the deal, Mahesh Balasubramanian, managing director at Kotak Life Insurance, said, “Bond forwards are a step in the right direction for hedging future risk. Earlier, under forward rate agreements (FRAs), the seller didn’t have a contractual obligation to sell the bond, but with bond forwards, the seller must deliver the bonds at a future date.”
He believes that this development is expected to enhance the risk management capabilities of insurance companies by providing a more robust framework for hedging. Bond forwards can help insurance companies manage interest rate risk. 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, thereby locking in the current yield and protecting against potential interest rate declines.
Consider a scenario where a customer buys an insurance policy now, and the insurance company needs to lock in returns for customers at the current rate. However, the insurance premium is paid in phases. In this case, bond forwards can help insurance companies hedge their interest rate risk. Even if interest rates fall, the insurance company benefits from the forward contract by purchasing the bond at the contracted price rather than at a higher market price. This was not possible before May 1, 2025, as buyers and sellers would enter into a forward rate agreement, where the seller would not have a contractual obligation to deliver the bond at the time of delivery.
Bond forwards also offer an advantage over FRAs as they involve the physical delivery of bonds while also allowing for cash settlement in some cases. Market participants believe that once initial challenges are overcome, bond forwards may eventually replace FRAs due to their added flexibility and potential for more comprehensive risk management.
In May 2025, the forwards market, including bond forwards and FRAs, reported deals close to Rs 6,000 crore. A senior official at CCIL said market participants are adopting a wait-and-watch approach. “Volumes are currently subdued, but we expect them to pick up once market players modify their contracts to accommodate the physical delivery of bonds.”
Bond forwards require physical delivery of bonds, unlike earlier rate-settlement contracts, necessitating end-to-end changes in accounting, technology, and operations due to significant legal and operational implications.
VRC Reddy, head of treasury at Karur Vysya Bank, believes that to boost volumes, a shift in the mindset towards trading and active participation is necessary. “The Indian bond 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. The long-only approach limits market activity, with only a few foreign banks actively participating in the forwards market. However, the volume of bond forwards is expected to gradually increase, driven by a rising demand from insurance companies, despite regulatory changes capping insurance premiums at Rs 5 lakh per year for tax exemption.”