KOCHI: India’s fixed-income market reached a turning point this May when Kotak Life Insurance and JP Morgan India executed the country’s first bond forwards trade, marking a key step toward a more dynamic and risk-managed debt market.
This deal – finalised on May 5 – was enabled by the Reserve Bank of India’s recent move to permit bonds forwards in government securities starting May 1, 2025.
The product is expected to give institutional investors like insurance companies and mutual funds access to more effective hedging tools, especially amid growing volatility in interest rates.
In the first trade, Kotak Life Insurance agreed to purchase Rs20 crore worth of 40-year, 7.34 per cent 2064 G-Secs from JP Morgan India, with delivery scheduled between five and seven years from now.
FRAs
Unlike earlier instruments such as forward rate agreements (FRAs) – which lacked binding delivery terms – bond forwards involve a contractual obligation to deliver the bond, bringing more certainty to long-term investment strategies.
“Bond forwards are a step in the right direction for hedging future risk,” said Mahesh Balasubramanian, MD at Kotak Life Insurance. “With bond forwards, the seller must deliver the bond at a future date, making it a more reliable risk management tool.”
For insurers, who often need to lock in yields now to meet future liabilities from policies sold today, bond forwards offer the ability to secure current returns even if interest rates fall in the future.
How are they different?
The key difference between bond forwards and FRAs lies in delivery and enforceability. While FRAs are settled in cash and based on interest rate differences, bond forwards require the actual delivery of bonds, bringing them closer to the physical nature of cash bond markets.
This shift increases legal, accounting, and operational complexity – but also promises deeper market discipline and hedging precision.
Buy-and-hold market
Despite the landmark deal, volume in the forwards market remains subdued. In May 2025, total forwards trading—including FRAs and bond forwards – was around Rs6,000 crore.
Market participants are taking a wait-and-watch approach, as physical delivery requires significant changes in settlement infrastructure and risk management systems.
“Volumes are low for now, but we expect them to rise as contracts evolve to accommodate physical delivery,” said a senior official at the Clearing Corporation of India Ltd (CCIL).
Another roadblock is mindset. India’s bond market remains dominated by long-only players – banks, insurance firms, pension funds – who often hold bonds to maturity and rarely trade. But unless there’s a cultural shift towards active trading, volume growth may be limited.
The Indian bond market functions more like an investment market than a trading one. “To boost volumes in bond forwards, we need broader participation and a willingness to actively manage interest rate risk,” said treasury head of a private. sector bank.
What’s Next?
While JP Morgan took the lead in this inaugural trade, more foreign and domestic players are expected to enter the space. As systems evolve and more insurers look for long-term hedging tools, bond forwards could gradually replace FRAs and become a core component of India’s fixed-income toolkit.
The big question now is whether this innovation will lead to a structural transformation in how India’s debt markets operate – from passive holding to active, hedged investing.
