Life insurers seek doubling of tax-free limit to Rs 10 lakh to boost long-term bond demand

Mumbai: Life insurers have urged the Centre to double the tax-exempt investment limits on guaranteed plans to ₹10 lakh from ₹5 lakh , arguing that such a move would help correct a structural demand problem in the long-duration government bond market that is seemingly hamstrung by growing institutional preference for equity assets.

Experts said the market for long-term government securities, or G-Secs, has faced an evident demand shortage as traditional long bond buyers-pension funds and annuity managers-moved a large portion of their portfolios to equities after allocation ceilings for stocks were recently raised to 25% from 15%.

"There is nobody ready to buy G-Secs now. We are the only ones left," one insurance executive said, adding that insurers remain the only stable, sizeable buyers of sovereign debt maturing in 30 or 40 years.


Curiously, the buyer shortage appears to have coincided with rising supplies of long-term bonds.

With both the central and several state governments extending borrowing maturities to manage fiscal pressures, supplies of long-duration bonds have lately risen. But demand has weakened, steepening the yield curve and widening the spread between 10-year and 30-40-year G-Secs.

To help soften yields at the long end of the maturity curve, the Reserve Bank of India (RBI) has already reduced the share of long-tenor issuance to 29% of its borrowing program, but the central bank cannot go lower because of upcoming maturities.

The government reduced its borrowing in the 30-50-year bucket to ₹30.5 lakh crore in the second half, versus ₹35 lakh crore in the first half of the year. This reduction, however, has not helped soften the long-tenure yields, which continue to rise with every auction.