Indian company borrowing costs see steepest rise since 2022 on fiscal risks

Borrowing costs for Indian companies are set to climb at the fastest pace in more than two years, as concerns mount that the government’s tax cuts may result in higher borrowing and squeeze out issuers.

 

The average yield on top-rated three year company notes climbed 26 basis points in two days through Tuesday, set for the steepest weekly gain since November 2022, data compiled by Bloomberg show. Yield eased slightly on Wednesday, slipping about two basis points amid thin volumes in the secondary market, traders said. Meanwhile, the 10-year bond yield has risen 11 basis points this week to 7.29 per cent, the highest since March.

 

Rising corporate bond yields are clouding fundraising plans just as economic momentum shows signs of cooling. Prime Minister Narendra Modi’s plan to lower consumption taxes to cushion the impact of higher US tariffs has stoked concerns that the government may sell more debt to plug revenue gaps. The prospect has rattled investors, pushing volatility in sovereign debt to a three-year high on Tuesday.

 

“A lot of negatives have piled up,” said Ashish Jalan, head of debt capital markets at Arete Securities Ltd. “Fiscal worries are rising, which is resulting in higher borrowing costs for companies and raising risks of being crowded out.”

 

Dimming prospects of further interest rate cut by the central bank are also pushing corporate bond yields higher, Jalan said, as investors await clarity on how the tax changes will affect the economy. 

 

Even so, yields on three-year corporate debt remain 55 basis points lower this year, helped by the Reserve Bank of India’s 100-basis-point rate cut and liquidity injections.

 

Still, higher borrowing costs threaten to slow local-currency corporate bond sales, said Soumyajit Niyogi, director at India Ratings, a local unit of Fitch Ratings. Firms have borrowed a record 7.9 trillion rupees ($90.8 billion) from onshore bond market so far this year. 

 

“Companies are likely to delay their spending decisions due to tariff uncertainty, geopolitical risks and to gauge the impact of tax cuts on growth,” he said.