Two repo rate cuts so far this year and expectations of a third one this week have forced down bond yields. Adding to the mix is the surplus liquidity in the system. While banks have begun to reduce loan rates, the fall in bond yields has been far sharper.
In April alone, companies raised over ₹91,410 crore through private placement of bonds, data from the Securities and Exchange Board of India (Sebi) showed. This was more than most months in FY25, and almost thrice what they raised a year earlier. This route is typically available for institutional investors. The month also saw public issues of ₹777 crore, compared to ₹687 crore a year earlier.
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“Given the comfortable liquidity combined with the two rate cuts, bond yields are really at rock bottom and market borrowings are a lot more attractive for corporates compared with bank loans. So, well rated corporates are busy issuing bonds,” said Anu Aggarwal, president and head of corporate banking, Kotak Mahindra Bank.
The interest of companies in the debt markets has been fuelled by softening yields.
Softening yields
Yield on India’s benchmark 10-year government bond has fallen 38 basis points (bps) in the last three months, and stood at 6.26% on Wednesday. The corporate bond market has seen a similar decline, varying across tenures and the borrower’s credit rating.
Banks operate in the bond market too; at the end of FY25, Kotak Mahindra Bank held ₹33,539 crore worth of bonds and commercial paper (credit substitutes), up 6% from a year earlier.
Banks through their treasuries, are investing in highly rated PSU or private sector bonds in lieu of government securities, due to an almost 100 bps differential, Aggarwal said.
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“Corporate loan growth across the banking system has been very muted. Whatever growth that we see can be attributed to a large extent to mid-market corporates, who are not bond issuers. But growth in loans to large corporates has been mostly flat to nominal,” said Aggarwal.
Muted capex
Bank loans to industries — micro, small, medium and large — grew 6.6% year-on-year in April, lower than 7.4% a year earlier. Of this, loans to large industries were up 4.5%. The past two years have seen capex heavy lifting by the government, with little capex and limited loan demand from private companies.
“Corporates continue to be cautious as far as private capex is concerned, but more importantly, there is ample cash on corporate balance sheets at this point in time. Therefore, we do expect that corporate demand going forward will be relatively muted,” Rajiv Anand, deputy managing director of Axis Bank told reporters on 24 April.
Many top-rated companies want to use the opportunity to raise funds when the yields are low, a top private sector banker said. “Of course, this is only true for those with AA and above rating,” the banker said on the condition of anonymity.
Transmission
Large liquidity infusions by the central bank have led to average system liquidity turning positive in the last couple of months. According to a report by IDFC First Bank on 3 June, the liquidity surplus improved to ₹1.7 trillion in May 2025, and is expected to rise to ₹5 trillion by August 2025, as government expenditure rises. The Reserve Bank of India (RBI) has also lowered the repo rate by 50 bps since February and another 25 bps cut is expected on 6 June.
Transmission of these rate cuts have had a greater impact on the bond yields of corporates, than on bank loans. According to Bank of Baroda, yields on AAA-rated one-year papers have declined 92 bps. Meanwhile, the median marginal cost of funds-based lending rate (MCLR)—an internal benchmark banks use to price corporate loans—has fallen 10 bps between February and May, as per RBI data.
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“The current easing cycle has been conducive for the corporate bond market,” Dipanwita Mazumdar, economist, Bank of Baroda said in a report.
Higher MCLR
In a note on 2 June, Mazumdar said that comparing the yields of different rated papers with corresponding MCLR of banks, showed that in the current cycle, yields of higher rated papers are lucrative for borrowing compared to MCLR rates of banks. Her analysis showed that the yield on one-year AAA-rated corporate bonds was at 6.8%, while for AA+ and AA, it was at 7.25% and 7.52%, respectively. MCLR rates of public sector banks stood at 9.08%, while for private banks, it was at 10% and therefore higher than the bond market.
“Among major various securities, the major pass-through of policy rate has happened for the highest rated AAA paper,” Mazumdar said in the report.
Others said that the first three months of a financial year are generally weaker than the rest for credit growth. “Expectations of a rate cut and faster transmission in capital markets are leading to the movement towards market borrowing,” said Karthik Srinivasan, group head of financial sector ratings, Icra Ltd.
Srinivasan said that it is not that banks are willing to lend but borrowers are not taking it. Corporate borrowers do not require a lot of funds till growth meaningfully picks up, he said. Banks have their own challenges on the deposit cost front, and till the time that comes off meaningfully, it will be difficult for banks to cut their lending rates, other than those which are linked to external benchmarks, he added.
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