Corporate Bond Market Sees 6% Decline in FY26 Amid Yield Pressures
Indian companies have significantly reduced their reliance on corporate bond markets for fundraising during the current financial year, with total issuances declining by 6% year-on-year to ₹6.76 trillion in the first nine months of FY26. This contraction comes despite substantial monetary easing by the Reserve Bank of India, which implemented a 125-basis-point reduction in policy rates alongside sustained liquidity support measures.
Contrasting Performance Between Fiscal Years
The Securities and Exchange Board of India (Sebi) data reveals a notable shift in corporate borrowing patterns. While 1,458 issuers accessed the debt market during April-December 2025, this represents a modest increase from the 1,219 borrowers who raised ₹7.18 trillion in the corresponding period of the previous fiscal year. The overall fundraising volume, however, has experienced a measurable decline, signaling changing market dynamics.
Quarterly Performance Reveals Volatile Trends
Market participants observed a distinct pattern of front-loaded borrowing activity during the initial months of the fiscal year. Anil Gupta, Senior Vice President and Co-Group Head of Financial Sector Ratings at ICRA, explained: "After reaching an all-time high in Q1 FY2026, bond issuance remained tepid during the second and third quarters. The rise in state government bond yields, driven by expectations of higher fiscal deficits, spilled over to corporate bond yields and negatively impacted issuance volumes."
The initial optimism that drove Q1 activity stemmed from expectations of imminent rate cuts and a sharp decline in bond yields preceding the RBI's easing cycle. However, this momentum dissipated rapidly as external factors intervened. The imposition of 50% tariffs on India by the United States in August 2025, coupled with persistent rupee depreciation, contributed to rising yields and diminished corporate appetite for bond market financing.
Persistent Yield Challenges Despite Monetary Easing
Despite the RBI's aggressive monetary policy stance—which included reducing the policy repo rate to 5.25% and cutting the cash reserve ratio to 3%—corporate bond yields remained stubbornly elevated. Yields on 10-year corporate bonds issued by the National Bank for Agriculture and Rural Development (NABARD) ranged between 7.24-7.26% as of December 31, 2025, representing an increase of 20-25 basis points from April levels.
Meanwhile, benchmark 10-year government bond yields experienced even more dramatic movement, jumping 40 basis points to 6.64% during 2025 according to Bloomberg data. This hardening of yields in the latter half of the year prompted numerous corporate issuers to reconsider their funding strategies.
Bank Loans Emerge as Preferred Alternative
The widening gap between bond yields and bank lending rates created a decisive shift toward traditional bank financing. A senior treasury official at a private sector bank noted: "Loan rates are significantly lower than bond rates for high-quality borrowers. This differential has pushed corporations decisively toward the loan market."
RBI data confirms this trend, showing that the weighted average lending rate on outstanding rupee loans declined by 47 basis points to 9.21% between April and November 2025. This attractive pricing, combined with greater flexibility, made bank loans increasingly appealing compared to bond market funding.
Structural Factors Influencing Market Dynamics
Venkatkrishnan Srinivasan, market veteran and founder of Rockfort Fincap, highlighted additional structural factors: "A significant contributor to the decline was the sharp moderation in bank bond issuances compared to the previous year. Comfortable system liquidity and stable deposit mobilization reduced banks' need to access bond markets for most of 2025."
Srinivasan further explained that longer-tenor bond markets faced particular pressure due to heavy supply of government bonds, which kept yields elevated and increased borrowing costs for corporations seeking extended maturities. In response, many companies explored alternative funding avenues, including offshore syndicated loans that reached record volumes during the year.
Future Outlook and Recovery Prospects
Market participants remain cautiously optimistic about gradual improvement in coming months. Gupta of ICRA noted: "The elevated credit-to-deposit ratio of banks and continued liquidity infusion by RBI should support bond issuance in Q4, though yield trajectory remains monitorable for supporting growth."
Several factors could potentially stabilize the corporate bond market, including continued RBI liquidity measures, easing pressure on banks' credit-deposit ratios, and a more cautious government borrowing program. Treasury officials also anticipate that renewed foreign investor interest and improving demand-supply dynamics may support recovery, particularly for high-quality borrowers.
As the market navigates these complex dynamics, corporate treasurers continue to weigh multiple financing options, with bond market recovery contingent on more favorable yield environments and stabilized macroeconomic conditions.
