India’s corporate bond market is facing subdued appetite as elevated yields and geopolitical risks push companies towards bank funding, according to a report by India Ratings and Research (Ind-Ra). The agency said domestic interest rates are at an inflexion point, with oil price volatility posing the biggest risk to inflation, currency stability and capital flows.
“A shift to higher prices now threatens higher inflation and spillover risks,” said Soumyajit Niyogi, Director at Ind-Ra, noting that costlier crude could widen the import bill and trigger foreign portfolio outflows.
Against this backdrop, the agency expects elevated bond yields and lingering global uncertainties to constrain corporate bond market activity in the near term, keeping funding preferences tilted towards banks. While bond yields rose through FY26, bank lending rates softened from the second quarter and stabilised by the fourth, narrowing the spread between the two channels and encouraging borrowers to switch.
Corporate bond issuance reflected this sensitivity to rate movements and external shocks. Total issuance moderated to around Rs 9 trillion in FY26, compared with Rs 9.9 trillion in FY25. Activity was front-loaded, peaking at Rs 2.92 trillion in the first quarter, but slowed sharply towards the end of the year. Issuances fell to Rs 2.2 trillion in the fourth quarter from Rs 2.7 trillion a year earlier, following oil price spikes and rising yields driven by geopolitical tensions.
Ind-Ra expects this pattern to persist, with borrowing decisions closely tied to yield movements. If yields remain elevated, corporates are likely to continue favouring bank loans despite broadly stable lending rates.
At the same time, abundant liquidity in the banking system is helping to anchor short-term rates. Government spending in April pushed surplus liquidity above Rs 5.5 trillion, exceeding 2 per cent of net demand and time liabilities, while average surplus remained above Rs 4 trillion through the third week of the month. This has led to a sharp correction in short-term yields, with one- to three-month commercial paper (CP) and certificates of deposit (CD) rates falling by 100–200 basis points from late-March highs.
Ind-Ra said such liquidity conditions, combined with seasonally weak credit demand in the first half of FY27, are likely to keep short-term funding costs benign. Lower funding needs among banks are also expected to limit CD issuance, further easing rates.
Issuance trends in the money market already reflect these dynamics. Corporate CP issuance rose to Rs 477 billion in April from Rs 315 billion in March, as companies tapped short-term markets for working capital at the start of the fiscal year. In contrast, non-bank financial companies (NBFCs) reduced their CP issuance sharply to Rs 385 billion from Rs 954 billion, reflecting year-end balance sheet adjustments and weaker demand.
CD issuance has also dropped significantly, falling to Rs 316 billion as of 21 April from Rs 2,450 billion in March, signalling reduced short-term funding pressure. Private sector banks dominated issuance at Rs 1.81 trillion, while public sector banks accounted for Rs 135 billion.
Ind-Ra expects CD issuance to remain muted in the early part of FY27 before picking up towards the end of the first half, as credit demand gradually improves. Overall, the report underscores a near-term shift in India’s credit markets, where elevated yields and global risks are reshaping borrowing patterns, even as ample liquidity keeps short-term rates in check. |
