BS BFSI Summit: 'Rising loan appeal hits corporate bond market's momentum'

While there is scope for further easing, the question is whether there is a need to cut rates further, said panellists

India’s corporate bond market, driven by public sector undertaking (PSU) banks and financial institutions last year, is losing momentum since the second quarter of FY26. This comes as corporates turn to bank loans for cheaper funding.

 

With yields staying elevated and demand subdued, total issuance is expected to fall well below last year’s level, panellists said at a discussion moderated by Subrata Panda.

 

While sharing his view on the panel titled ‘Navigating Global Turmoil: Can India stay the course?’  Shailendra Jhingan, MD, ICICI Securities Primary Dealership, said, “We think that overall, the number last year, which was ₹11.1 trillion or thereabouts, we are going to end (2025-26) at a lower number. The main reason I see is that in the loan market, the rates are significantly cheaper. There is a move where corporates are moving away from bonds and accessing the loan market. With the repo rate at 5.5 per cent, the external benchmark lending rate (EBLR) loans look far more attractive compared to corporate loans at the current level. So, I think that trend is pretty much evident. The supply will be tepid going ahead also.”

 

After a surge in corporate bond issuances in the first quarter, activity slowed in the second quarter as borrowing costs climbed.

 

Indian corporates, had raised a record ₹4.07 trillion through debt in the first four months of the current financial year.

 

Arup Rakshit, Group Head Treasury, HDFC Bank, said, “The loan market is much cheaper currently. And, with the credit offtake, not really in the space that it should be, it is easier for a bank also to take it as a loan. Accounting principles have also changed in Head the way you treat, how you hold the corporate bond. So, it is something which is tapering out.”

 

On foreign portfolio investor (FPI) flows in the debt segment, panellists said that with India’s inclusion in the JP Morgan EM Bond Index, passive inflows of about $24–25 billion had been expected, and that has largely materialised.

 

Most of these investments have come from passive investors. In contrast, active investors, typically fast-moving participants, tend to respond to expectations of rate cuts, declining bond yields, or potential currency appreciation.

 

The panellists said that many such investors had entered when domestic g-sec benchmark yield was around 6.2 per cent and exited once it appeared that the rate-cutting cycle was nearing its end.

 

Some of them have now returned as yields hover around 6.5–6.55 per cent and the rupee appears fairly valued.

 

Aditya Bagree, MD & Head-Markets, India & South Asia, Citi, said, “Despite these developments, foreign holdings of Indian government securities remain low at around 5 per cent (of the total limit), with even smaller exposure in state development loans and corporate bonds. Consequently, India’s bond market continues to be largely domestically driven, supported mainly by mutual funds, pension funds, insurance companies, and banks.”

 

However, demand from these domestic institutional investors has eased in recent months, partly due to regulatory and tax changes.

 

The key challenge, Bagree added, “is to find ways to revive and sustain demand in the fixed income market.”

 

On domestic rate trajectory, panellists said that, looking ahead, there may not be much need for further rate cuts.

 

However, given that the Reserve Bank of India (RBI) has indicated that there is scope to ease rates, it is likely to proceed with a cut in December.

 

Beyond that, a prolonged pause is expected. The central bank may also aim to reduce the liquidity surplus it has been maintaining, bringing it closer to a neutral level, perhaps just below 1 per cent of net liquidity.

 

They said that December, therefore, remains a “touch-and-go” scenario. Much will depend on developments around the trade deal; if no agreement is announced by then, the RBI may implement a rate cut as a precautionary measure. 

 

In short, while there is scope for further easing, the question is whether there is a need to cut rates further.

 

On the rupee, Bagree said that the currency has been an underperformer in recent months, attributing the weakness to several factors. One key reason, he said, is seasonal.

 

The July–September quarter typically proves challenging for the currency, as it coincides with higher outflows related to imports, defence payments, and remittances. Import demand also tends to rise ahead of the festival season, leading to a historical pattern of rupee underperformance during this period.

 

Another factor, he pointed out, has been the absence of strong portfolio inflows into India.

 

While several global and domestic factors have contributed to this trend, the outlook could improve as growth momentum strengthens, corporate earnings continue to surprise on the upside, and foreign investors reassess their positions.

 

A resolution to the ongoing trade and tariff issues could further aid portfolio flows.

 

From a seasonal standpoint as well, the rupee is now entering a more favourable phase. In the short term, he remains constructive on the currency’s prospects.