Indian Insurers Seek Collateral Easing Amid Bond Volatility

As of November 17, 2025, Indian insurance companies are seeking to renegotiate collateral rules with banks for their bond-derivative trades. This comes after recent bouts of volatility in the bond market, which forced some market participants to set aside more cash, straining their liquidity.

At least three private sector insurers have approached their bank counterparties, requesting them to accept government bonds - assets they already hold in large amounts - instead of requiring cash collateral. Currently, insurers must post cash as margin for these deals, with the rules set by individual banks rather than regulators.

The discussions have taken place during recent talks between senior executives of insurance companies and banks. While the negotiations are ongoing, it remains uncertain whether the banks will agree to the insurers' requests.

The need for these discussions has arisen due to a spike in local bond yields, which hurt bond valuations and compelled insurers to set aside more cash. In August, India's 10-year bond yield rose by as much as 35 basis points, the worst selloff in three years, driven by concerns over fiscal strain and a cautious central bank stance.

Allowing bonds as collateral may help ease the funding pressures faced by insurers during turbulent periods, as they have become major players in India's debt market. However, a potential hurdle for banks is how to value the bonds pledged as collateral, particularly when prices are falling.

The discussions highlight the challenges long-term investors face in India's debt market, where large bond supply and limited room for monetary easing continue to put pressure on yields. In recent years, insurers have increased their use of bond derivatives to lock in interest rates as demand grew for guaranteed-return products, helping anchor long-term borrowing costs in the economy.