Corporates usually wait for RBI rate decision before bond offers. Not this time

Mumbai: Bond issuers have flooded the market with long-term paper ahead of the 5 December Monetary Policy Committee meeting, breaking from past trends amid uncertainty about a rate cut, a weakening rupee, and a high supply of central and state government debt.

Over the past two weeks, financial institutions such as Axis Bank Ltd, Power Finance Corp., Canara Bank, ICICI Bank Ltd, Indian Railway Finance Corp, and ICICI Prudential Life Insurance Co. have issued bonds with a tenure of 10-15 years, collectively raising around ₹19,600 crore.

“Market participants are wary of whether the yields will come down or not post policy,” said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap, a fixed-income institutional advisory firm. “Of late, participants tend to discount the policy outcome well before the policy based on research and expectations. When the policy is broadly in line with expectations, yields often inch up slightly, which is why several large regular issuers prefer to tap the market ahead of the policy."

Typically, the period before the MPC meeting sees muted bond issuances as issuers prefer to wait till after the policy outcome to tap the market. While economists and analysts are divided on the MPC’s stance in Friday’s decision, there is no possibility of a rate hike.

In a normal situation, that implies issuers stand to benefit from lower yields even if the rates remain unchanged. However, this time around, the market expects that, due to a steep yield curve—when yields on long-term bonds rise faster than those on short-term paper—any rate action will have an impact only on the short end of the curve.

As a result, issuers have been preferring longer tenure bonds of up to 10 years to lock in their fundraises at these rates before long-term yields harden further.

The benchmark yield on 10-year government bonds hardened to 6.57% on 30 September from 6.32% on 30 June, closing in on levels of 6.58% seen on 31 March. This was largely driven by concerns over US tariffs, the Reserve Bank of India (RBI) reverting its stance from 'neutral’ to ‘accommodative’, and an expected increase in central-government borrowings to make up for the reduction in goods and services tax (GST) rates, according to an October report by Icra Ltd.

“The market is obviously a little divided on the rate cut. An interesting bit is obviously also that the (US Fed’s) FOMC meeting will follow the MPC meeting, where the outcome also remains uncertain. So there is volatility, and that is why for the pockets where there is value, people are just going and doing an issuance trying to close out their fundraising,” said a senior official at a large fixed income advisory and investment banking firm.

“With the GDP number coming in strong and inflation expectations being benign, the rationale for a cut has gone down quite significantly. And that is what the market is reading into,” he said. Either way, he doesn’t see the yields moving significantly away from current levels and should remain in a range of +/- 10 bps.

Supply glut driving up yields

A major reason for the fundraising rush by corporates has been the increased issuance of bonds by central and state governments, which has saturated the long-term market and reduced demand for corporate issuers.

Until 14 October, states had borrowed ₹5.23 trillion—62.1% of their planned borrowing till the December quarter—higher than ₹4.37 trillion a year earlier, according to an October report by Bank of Baroda.

While state governments tend to borrow in the last quarter of a financial year, lower support from the Centre and weak fiscal positions have prompted significantly higher borrowings by states in FY26 so far. Weaker states have been offering rates up to 100 basis points above the yields on central government securities of an equivalent duration to attract investors, hardening long-term yields.

In the 2 December auction of state government securities, Bihar raised ₹910 crore via 10-year bonds at a weighted average yield of 7.3%, whereas Andhra Pradesh raised ₹1,000 crore each via 15-year and 19-year bonds at an average yield of 7.5-7.6%, and another ₹1,000 crore via 11-year bonds at 7.3%. Punjab raised ₹1,000 crore via 10-year bonds at 7.4% and West Bengal mopped up ₹965 crore via 12-year bonds at 7.5%.

Despite a 100 bps cumulative rate cut by the RBI since February 2025 and a similar reduction in banks’ cash reserve ratio (CRR) effective September, the 10-year bond yield has largely remained around 6.50%-- similar to levels seen before the beginning of the rate easing cycle.

Corporate bond issuances are expected to be higher in the last quarter of the financial year as most corporates, other than the top-rated ones, are still finding it cheaper to raise funds from the market rather than borrow via bank loans.

The recent bond issues in December saw long-term fundraising at 6.8-7.7% for 10- to 15-year bonds. In comparison, the weighted average lending rate on outstanding loans of banks was at 9.24% for October 2025–private banks at 10.2% and public sector lenders at 8.6%.

“Largely, the view remains that this is the right time to issue longer-tenor bonds, as there is limited room for yields to fall,” Srinivasan said. Additionally, most entities typically invest in long-tenor instruments between November and January to meet their minimum investment criteria, so many issuers are now opting for long-tenor corporate bonds in the hope of capturing this market, he said.

Icra revised its estimate of bond issuance in FY26 to ₹12.0-12.4 trillion from the earlier estimate of ₹11.1-11.7 trillion, highlighting that this increased supply may lead to further hardening of the yield curve.

On the other hand, banks have been borrowing more as credit growth continues to outpace deposit growth, exerting pressure on their credit-deposit ratios.

Weaker rupee fuels bond rush

With the Indian rupee being one of the worst-performing Asian currencies in 2026, investments by foreign portfolio investors (FPI) have also slowed despite a 250 bps differential between the yields on US Treasuries and Indian government bonds.

“We are not seeing large FPI inflows coming into the system, even though FPIs are comfortable with Indian bonds,” Srinivasan said, adding that this is largely due to the currency volatility and concerns over tariff-related disruptions.

For foreign investors, a weak rupee means that any incremental gains from higher bond yields in India are offset by the higher hedging costs of converting their investments into the domestic currency.

Net inflows from FPIs stood at $0.2 billion in November (as on 25th of the month) compared with $4.03 billion inflows in the previous month, according to a note by India Ratings.

Sustained weakness in the rupee has added to the uncertainty surrounding macro fundamentals despite strong GDP growth, controlled inflation and steady other metrics.

“While soft inflation prints indicate policy space is available, recent developments have muddled the picture. Foreign-exchange intervention, undertaken to manage external pressures, has also reduced system liquidity,” said Umesh Sharma, chief investment officer—debt at The Wealth Company Mutual Fund.

“India’s inclusion in the Bloomberg Global Aggregate Bond Index could support debt-market flows, though these may be balanced by fiscal risks and higher future spending commitments. Given these factors, further rate cuts may have limited impact.”

According to Soumyajit Niyogi, director at India Ratings, domestic banking system liquidity is expected to turn volatile and could slip into deficit by mid-December, driven by quarterly advance tax outflows and monthly GST payments. In a 3 December note, he suggested that durable liquidity infusion by RBI would not only strengthen monetary transmission but also help ease pressure on bond yields.

Srinivasan expects the market to stay in this range until the RBI conducts more open market operations (OMOs) or bond purchases to improve liquidity. “Even with a rate cut, yields are unlikely to fall meaningfully due to rupee weakness and US tariff concerns, and the curve may continue to swing unless OMOs support it."