Companies face soaring short-term debt costs despite RBI support

This surge in interest rates has come despite liquidity injections by the Reserve Bank of India (RBI), with seasonal tightness in March adding to the pressure, multiple treasury officials told Mint.

On Friday, the National Bank for Agriculture and Rural Development (Nabard) raised about ₹6,000 crore through one-year CDs at 7.35%, around 25 basis points (bps) higher than interest rates seen a week ago.

“For a three-year paper, Nabard was willing to pay 7.50%, but the demand was at 7.60-7.70%, so they did not raise funds through three-month maturity but raised one-year paper, and if rates are high, they will borrow short-term,” a senior treasury official said on the condition of anonymity.

Treasury officials expect more companies to tap the money market after Nabard, but warn that even short-term borrowing will be challenging.

Expensive debt

Since the beginning of the month, interest rates on three-month CDs, issued by scheduled commercial banks and select all-India financial institutions (AIFIs), have risen by 25-50bps to 7.30-7.80% as of 13 March, while one-year CD rates have increased by about 25bps to 7.15%, according to data from Derivium Tradition Securities India Pvt. Ltd.

Rates on three-month CPs issued by non-banking financial companies (NBFCs) have jumped by 45bps to 7.55-8.05%, while those with one-year maturities have risen by 25-30bps to 7.50-7.60%.

Typically, short-term interest rates rise in March due to seasonal fiscal-year-end factors, as banks and financial institutions step up funding activity to maintain liquidity amid tax outflows.

“Because of advance tax outflows and goods and services tax (GST) outflows, it was expected that short-term rates would go up, but signs are visible that, despite RBI’s liquidity injection through open market operations, short-term rates have spiked,” the treasury official added.

So far, the central bank has conducted two auctions of ₹50,000 crore each. As of 12 March, liquidity in the banking system was in surplus of ₹2.48 trillion.

In January, banks and financial institutions raised ₹1.48 trillion through 111 CDs, followed by ₹2.67 trillion in February, compared with ₹99,435 crore and ₹1.29 trillion raised in the same months in 2025, respectively, data from Prime Database showed.

War effect

While this seasonal factor was expected to have weighed on short-term rates, volatility in bond yields has also led to a shift in borrowing preferences.

The recent rise in bond yields following the jump in crude oil prices due to the US-Israel-Iran war has prompted several financial institutions to defer bond issuances and opt for short-term instruments.

“Small Industries Development Bank of India (Sidbi), Nabard, and other development finance institutions have cancelled their planned borrowings from the bond market because of elevated rates," said V.R.C Reddy, treasury head at Karur Vysya Bank.

“They are moving to the money market because, instead of raising a three-year or a five-year bond, it is better to go for short-term borrowing so that they can replenish with lower rates beginning from April,” he added.

On 13 March, Mint reported that the surge in bond yields triggered by rising crude oil prices has prompted several borrowers to either defer plans to the next year or borrow selectively.

“The recent spike in CD rates is partly seasonal, but it has been amplified this time by a temporary mismatch between funding demand and investor appetite in the bond market. As a result, the CD segment is witnessing a surge in supply from both banks and AIFIs, while investors remain cautious in locking funds in longer-tenor bonds,” said Venkatakrishnan Srinivasan, founder at Rockfort Fincap.

Activity from mutual funds and secondary market trading is also contributing to the rise in money market rates. “Mutual funds are facing redemptions, so they are exiting and are selling short-term papers in the secondary market, leading to higher levels,” Reddy said.