India's corporate bond market is experiencing a dramatic slowdown as borrowing costs reach their highest levels in seven years. According to Business Standard, Indian firms raised around ₹1.07 trillion in April-May FY27, representing the lowest mobilisation in the first two months of a financial year since FY23. This compares unfavorably to the ₹2.53 trillion raised in the same period last year, highlighting the dramatic impact of rising borrowing costs. The market disruption is particularly evident in the two- to five-year AAA-rated corporate bond yields, which rose above 8% last week, marking the highest levels since January-March 2019. This represents a substantial increase from the previous period, with two-year AAA corporate bond yields surging by about 40 basis points in May, while yields in the three- to five-year segment rose by around 30 basis points. The 10-year government bond yield has risen about 35 basis points since the conflict began late February and is currently hovering above 7%, with borrowing costs rising in anticipation of higher policy rates and tighter liquidity conditions from the Reserve Bank of India.
The market slowdown is translating into significantly reduced fundraising activity across the corporate sector. As reported by Business Standard, April issuances plunged 64% year-on-year to ₹40,443 crore, while May declines were 53% to ₹66,680 crore from the previous year. Market participants attributed the sharp decline to elevated yields amid the war in West Asia, which kept issuers away from the debt market. The 10-year government bond yield has risen about 35 basis points since the conflict began late February and is currently hovering above 7%. The pipeline for upcoming months appears equally challenging, with merchant bankers estimating potential fundraising could reach around ₹1 trillion, indicating continued pressure on corporate bond issuance. Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, noted that the environment is more challenging with continuing geopolitical tensions, higher crude oil prices, pressure on the rupee, and concerns over the current account deficit pushing market yields higher. Companies issued ₹1.75 trillion of debt in the same period last year, highlighting the dramatic year-on-year decline in fundraising activity.
The current environment is prompting companies to reconsider their funding strategies, with a notable shift towards bank lending. As reported by Business Standard, many companies are opting for bank loans, as borrowing costs in the loan market have become more attractive than bond issuances. Banks' credit to non-banking financial companies jumped nearly 28% in April to ₹20.56 trillion, according to central bank data. Binod Kumar, managing director and CEO at Indian Bank, confirmed that companies are moving towards bank loans, with NBFCs now focusing only on loans rather than seeking both loans and bonds. This trend is expected to continue throughout the year as companies seek to avoid the higher costs associated with long-term fixed-rate corporate bond funding. Venkatakrishnan Srinivasan noted that many issuers are adopting a wait-and-watch approach, relying on short-term borrowings, External Benchmark Lending Rate (EBLR)-linked bank loans, and commercial papers until there is greater visibility on the RBI's policy direction. Rates in the bond market rise quicker than bank lending rates, prompting a shift towards borrowing from banks by large companies.
The current market environment underscores the importance of portfolio diversification and risk management in corporate bond investing. According to Fulcrum Alternative Solutions, portfolio resilience requires careful monitoring of key metrics including loan-to-value ratios, loan seniority, interest cost coverage from free cash flow, and portfolio concentration levels. The asymmetric nature of credit returns means investors must prioritize borrower cash flow generation and maintain disciplined underwriting standards to ensure capital protection. EMD introduces differentiated return streams, as economic cycles in emerging economies do not always align with developed markets, improving portfolio construction and reducing concentration risk in traditional fixed-income benchmarks. As recent market stresses have shown, investors must focus on building resilient portfolios that can withstand various risk scenarios while maintaining focus on fundamental risk management principles. The current environment is likely to accelerate the shift towards floating-rate bonds, short-term borrowings and bank loans rather than locking into higher long-term fixed-rate funding.
