Indian companies have withdrawn ₹94,500 crore in bond issuances during financial year 2025-26 (FY26) and the first five months of FY27, according to reports from Business Standard. The withdrawals represent a significant shift in corporate bond market dynamics, with FY26 recording the highest withdrawals in at least a decade at ₹79,500 crore. FY27 has already reached ₹17,500 crore by August 23, indicating sustained market pressure on bond pricing. Recent market developments show some positive momentum, with The Economic Times reporting that Indian government bonds experienced a positive turn as oil prices fell sharply, reducing inflation worries among investors. The successful state debt auction further bolstered market confidence, contributing to resilience in the debt market.
Former SBI Chairman Dinesh Khara, now heading the Corporate Bonds and Securitisation Advisory Committee (CoBoSAC) under SEBI, has identified a critical liquidity crisis in India's bond market. As per CNBC TV18, trading activity in the bond market is just about 0.16 to 0.17%, making it function more like a buy-and-hold club than a liquid market capable of funding the country's growth needs. The market functions relatively well for highly rated AAA and AA bonds, but trading activity drops sharply for lower-rated investment-grade securities, even though many companies seeking capital operate in these segments. Lower-rated issuers avoid bonds and prefer bank loans, which offer more flexible terms and lower disclosure burdens, according to a NITI Aayog report released in late 2025. The National Bank for Financing Infrastructure and Development estimates that India needs ₹40 lakh crore in annual infrastructure investment, twice the current level, making a more liquid bond market essential for funding massive infrastructure upgrades.
The primary driver behind these withdrawals is a fundamental yield mismatch between investor demands and issuer pricing, according to Business Standard reports. Investors are demanding higher yields than issuers are willing to offer, creating a pricing disconnect that has made bond issuances unattractive for companies. Market participants explain that money is available, but investors are unwilling to lock it into two-three-year bonds at current yields and are demanding a higher premium for taking duration risk, as reported by Business Standard. With 91-day Treasury bill yields only marginally above the 5.25 per cent repo rate and commercial paper rates relatively close to the policy rate, money-market instruments are not necessarily offering higher returns but provide investors with liquidity and flexibility. The situation is further complicated by stronger German growth reinforcing expectations for ECB rate hikes, keeping borrowing costs high across Europe, as reported by The Economic Times.
The current market dynamics reveal a clear duration risk premium gap that explains the contrasting performance between short and long-term bond issues. As per Business Standard, large borrowers can continue to access commercial paper, bank funding linked to external benchmark lending rates and foreign currency borrowing, making issuers reluctant to pay substantially higher yields for two-three-year bond funding. The contrasting performance of 10-year and 15-year segments shows long-term investors, including those investing to meet regulatory, portfolio-duration or asset-liability requirements, are more willing to lock in attractive absolute yields for longer periods. A dealer at a state-owned bank noted that "the withdrawals are in short term because the yields have surged in that segment, the long term which is 10 year and 15 year is getting good demand," adding that "the short term bond issues are not even getting enough bids."
The sustained withdrawals point to a structural pricing challenge in the corporate bond market rather than temporary market conditions, as reported by Business Standard. The trend indicates that companies are willing to delay or abandon bond issuances rather than accept unfavorable pricing terms. Recent market developments show some stabilization, with Eurozone bond yields remaining largely stable as traders evaluate newly imposed U.S. sanctions on Iran and easing oil prices, according to The Economic Times. However, the underlying yield mismatch continues to create headwinds for corporate bond issuances, with uncertainty around inflation, elevated crude oil prices, the rupee trading near ₹95-96 to the dollar, geopolitical risks in West Asia and possible food inflation pressures from the monsoon making investors cautious about taking duration risk, as reported by Business Standard. The SEBI committee under Khara's leadership aims to address these challenges through credit enhancements, backstop arrangements and other risk-mitigation mechanisms to improve investor confidence in lower-rated but investment-grade securities.
