India’s pension funds are wielding growing influence in the country’s financial markets, competing directly with major bond investors to secure debt sales.
The National Pension Scheme (NPS), a voluntary retirement savings programme, has seen its assets surge by more than 23 times to 11.7 trillion rupees (S$189 billion) over the past decade, driven by an increasing number of savers using this low-cost avenue to provide for their later years.
The increased firepower has fuelled a surge in the issuance of longer-dated paper, with pension funds holding 4.4 per cent of the total bonds outstanding as at December, up from 3.6 per cent in June 2022, according to official data. Their heft is set to expand as India’s rapid economic growth brings a larger workforce under the pension fold, according to DSP Pension Fund Managers.
Their influence became evident when the government in March introduced a new 15-year paper based on market feedback. In fact, bonds with a tenor of 15 years and above now make up more than half of the federal borrowing plan for the first half of the current fiscal year.
The successful debut of the 50-year bond in 2023 also underscores demand from insurance and pension funds for ultra-long papers. Pension funds tend to follow a strategy of matching liabilities – which are usually long term – with similar-maturity debt.
“This increased participation by pension funds brings liquidity and stability in the market,” said Mr Rahul Bhagat, chief executive at Mumbai-based DSP Pension Fund.
“Pension funds will overtake all other asset classes as contribution grows, and more subscribers get on-boarded.”
India’s burgeoning life insurance and pension fund industries, driven by a structural shift in household savings towards financial assets, are changing the landscape for the nation’s US$1 trillion (S$1.35 trillion) sovereign debt market that is set to be added to global bond indexes in June.
The country’s yield curve has been nearly flat even amid record borrowing by the government in recent years, with the gap between the five-year and 30-year bonds shrinking to 10 basis points from more than 150 basis points in 2020.
The yield on the benchmark 10-year bond was steady at 7.16 per cent on May 3, after surging by 13 basis points in April, the biggest jump in six months.
That should help lower the funding costs for the infrastructure-building plan, a cornerstone of Indian Prime Minister Narendra Modi’s campaign for a third term.
Pension funds still have room to grow.
Lenders held 38 per cent of government debt as at the end of December, followed by insurers at 26 per cent. In contrast, Australia’s pension funds own 12 per cent of their nation’s fixed-income assets.
India began the NPS about two decades ago to provide a low-cost and tax-efficient savings account for retirement. As at March 31, the fund had more than 73 million subscribers, which is a fraction of India’s population and less than half the number of stock-trading accounts in the country.
Even so, pension funds complement the newer crop of investors in India’s debt market. Global investors are also steadily increasing their investments in local sovereign bonds ahead of their inclusion in JPMorgan Chase’s global indexes.
“As NPS demand is usually at the long end of the curve, the market in that segment will develop. The issuance of a 50-year government bond illustrates this point,” said Mr Nagaraj Kulkarni, co-head of Asia rates ex-China at Standard Chartered Bank in Singapore. BLOOMBERG
