In a significant market development, several major state-owned financial institutions have abruptly halted their planned bond issuances, highlighting a growing rift between the Reserve Bank of India's monetary policy signals and the actual pricing in the debt market.
A Wave of Withdrawals Hits the Market
On Monday, Indian Railway Finance Corp Ltd (IRFC) became the third public sector borrower in a week to pull back from a fundraising plan. This follows similar decisions by Power Finance Corp (PFC) and the Small Industries Development Bank of India (Sidbi). The core issue in each case was a mismatch between the interest rates investors demanded and what the issuers were willing to pay.
IRFC withdrew its plan to raise up to ₹5,000 crore through 10-year zero-coupon bonds (ZCBs). Merchant bankers revealed that while the company received bids worth over ₹4,461 crore, the offered yields ranged between 6.63% and 7.23%. This was above IRFC's expected cut-off in the range of 7.23-7.25%, leading to the cancellation.
This episode mirrors last week's events. PFC scrapped its ₹3,500 crore 15-year bond issue after bids came in around 7.18%, higher than its anticipated 7.1%. Similarly, Sidbi withdrew an ₹8,000 crore bond sale slated for November 2029 maturity. Sidbi was targeting a rate near 6.8% but found investor appetite only around 6.9%.
Why Are Bond Yields Defying the Rate Cut?
Market experts point to a complex cocktail of factors causing this disconnect. The RBI's Monetary Policy Committee (MPC) cut the repo rate by 25 basis points to 5.25% on 5 December. However, instead of softening, the yield on the benchmark 10-year government bond has actually risen by about 10 basis points to 6.59% since that announcement.
"The PFC–SIDBI–IRFC zero coupon bond episode is a textbook reminder that bond market sentiment often overwhelms monetary policy signalling," said Venkatakrishnan Srinivasan of Rockfort Fincap LLP. He cited pressures from rupee depreciation, global uncertainties, muted foreign inflows, and a heavy pipeline of government borrowing.
Economists note the gap between the repo rate and the 10-year bond yield has widened abnormally. Madan Sabnavis, Chief Economist at Bank of Baroda, stated the historical difference is 80-100 basis points, but it now stands at a stark 134 basis points.
A key moment was the RBI's clarification on December 5th that its Open Market Operations (OMOs) are purely for liquidity management, not for controlling yields. This removed a potential support for bond prices, contributing to the hardening of yields.
Broader Market Implications and Outlook
The withdrawals are seen as a sign of market discipline rather than weakness in the specific issuers. Accepting significantly higher yields would have set a costly precedent and disrupted pricing for future issuances, especially in the nascent zero-coupon bond segment.
V.R.C. Reddy, Head of Treasury at Karur Vysya Bank, explained that long-term yields are driven by factors beyond just the policy rate: "liquidity conditions, fiscal supply, inflation risk and investor balance sheet constraints." He added that yields may not align with policy signals until liquidity improves and supply pressures ease.
On the demand side, institutional appetite from insurers and pension funds remains subdued. Furthermore, banks are offering competitive loan rates, providing an alternative for borrowers. The weighted average lending rate on fresh bank loans was 8.64% in October, making certain bond issuances less attractive if pricing is not favorable.
This series of cancellations underscores a challenging period for India's corporate bond market, where traditional monetary policy transmission mechanisms appear temporarily stalled, forcing state-owned giants to recalibrate their fundraising strategies.
