According to a report by Bank of Baroda (BoB), borrowing costs in India's bond market are expected to increase in the coming months as upside risks to India's 10-year government bond yield continue amid an uncertain macroeconomic environment. The report noted that the outlook for India's 10-year government bond yield remains uncertain and will depend on evolving global conditions, including war-related developments, liquidity conditions, inflation and government borrowing. As reported by The Economic Times, the Reserve Bank of India's current rate cycle is likely to remain cautious even if there is no rate hike, with the report expecting upside risks to India's 10-year bond yield to continue. The report emphasized that coupled with uncertain macro conditions, the risk premium for different entities is also likely to be higher and have a bearing on these bond spreads.
According to the BoB report, bond spreads across different categories of issuers increased broadly between March 2026 and June 2026, indicating a rise in the premium investors demand over risk-free government securities. A bond spread is the difference in yield between two different bonds, usually measured in basis points, and is primarily used by investors to measure the relative risk, value, and return potential of one fixed-income asset compared to another. The spreads on bonds for PSU FIs & Banks (PFBs), NBFCs and Corporates indicate how the risk premium has evolved over time, with these spreads benchmarked to the risk-free GSec. The report noted that besides the movement in these yields, business environment at both the macro and micro levels hold the cue for the direction of spreads.
As reported by The Economic Times, among different borrowers, Public Sector Financial Institutions and Banks (PFBs) continue to have the lowest spreads, reflecting their status as institutions that are either owned by the government or considered similar to government institutions. Corporate borrowers have slightly higher spreads than PFBs, although the difference remains relatively narrow and varies across credit ratings. The financial performance of individual companies, along with industry and overall business conditions, plays an important role in determining these spreads. The report highlighted that the financial performance of individual companies, along with industry and overall business conditions, plays an important role in determining these spreads.
According to the BoB report, Non-Banking Financial Companies (NBFCs) continue to face the highest borrowing premium in the bond market. The report attributed this to higher risk perception associated with the sector and the fact that NBFCs account for 60-70 per cent of bond issuances in the market. This concentration of NBFC issuances in the bond market has significantly impacted the overall borrowing cost landscape for the sector. The report noted that NBFCs continue to face the highest borrowing premium in the bond market.
Looking ahead, the BoB report said borrowing costs in the bond market could rise further if India's 10-year bond yield moves higher and macroeconomic uncertainty persists. The report emphasized that coupled with uncertain macro conditions, the risk premium for different entities is also likely to be higher and have a bearing on these bond spreads. The business environment at both the macro and micro levels holds the cue for the direction of spreads, with the current environment of macroeconomic unpredictability potentially leading to even steeper borrowing rates. The report concluded that borrowing costs in the bond market could rise further if India's 10-year bond yield moves higher and macroeconomic uncertainty persists.
