Over 60 per cent of the long-term government papers issued in the current fiscal have been mopped up by the insurance industry.
The Life Insurance Corporation of India alone accounts for over 55 per cent of the Rs 18,000-crore (Rs 180 billion) of long-term paper issued till July 15.
With growth in business, the new insurance players have also become active in government auctions.
"We have picked up more than Rs 12,800 crore (Rs 128 billion) mostly through auctions, with another Rs 250-odd crore (Rs 2.50 billion) from secondary market deals," said LIC managing director R N Bhardwaj.
In the recently conducted Rs 3,000-crore (Rs 30 billion) auction of the 7.95 per cent GoI 2032 paper, LIC picked up Rs 2,800 crore (Rs 28 billion) at a half-yearly coupon rate of 6.2 per cent. This gives an annualised return of 6.3 per cent.
As life insurance companies have to invest at least 50 per cent of their annual income in government paper, "We try to pick up as much as possible in the beginning of the year through primary issues as it is difficult for us to do so later," he added.
In accordance with its fund flow, LIC has a huge requirement, which may not easily be met through secondary market volumes.
Majority of the government's borrowing programme is usually completed in the first half of the fiscal.
Accordingly, LIC prefers to complete as much of its investment in government securities in the beginning of the fiscal.
This year, however, the government's borrowing programme has been evenly spread out so as not to disturb the yields too much.
"While the yields on our investments have come down in this quarter over the corresponding quarter last year, the yields in Q1 of 2003-04 are similar to those prevailing in Q4 of 2003," said Bhardwaj.
LIC has not always been successful in mopping up long-term paper. In the earlier auction of 6.13 per cent GoI 2028 paper on July 1, LIC was able to pick up less than half of the amount.
Banks and primary dealers bid aggressively, at the time being very bullish on the interest rate front.
Of the Rs 60,000 crore (Rs 600 billion) paper issued till date through various auctions, about Rs 18,000 crore (Rs 180 billion) has been by way of long-term papers of at least 20-year maturity.
As insurance liabilities are long-term in nature, LIC has shown preference for paper of over 20-year maturity.
In fact, it did not bid aggressively at the July 15th auction of the Rs 6,000-crore (Rs 60 billion) 6.35 per cent GoI 2020 paper.
Doing so would have affected the average yield of LIC since the cut-off yield was 5.97 per cent.
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