The Reserve Bank of India’s nearly $100-billion of liquidity infusion since December 2024 has led to a sharper fall in short-term bond yields compared to their long-term peers, triggering a change in the way companies borrow.
“The has infused ample liquidity and has made sure the system is in continuous surplus of almost ₹2 lakh crore, which has caused more corporate bond issuances. Additionally, the market has factored in further rate cuts too,” said Venkatakrishnan Srinivasan, who is the founder of Rockfort Fincap, a debt advisory firm.
Indian corporates are increasingly favoring the bond market, particularly short-term bonds, due to banks’ slow response to rate cuts. Liquidity infusion by the RBI has significantly lowered short-term bond yields, prompting this shift. AAA-rated companies find bond yields more attractive than bank MCLR rates, while lower-rated firms may still prefer bank credit.
For AAA-rated companies, a five-year bond had a return of around 6.65% in May 2025, versus 7.50% in May 2024. For a 10-year paper, the reduction in borrowing costs is not as much, with interests of 6.85% in May 2025, versus 7.45% in May 2024.
Additionally, loans to corporates linked to the marginal cost of fund-based lending rate (MCLR) have seen just about a five basis point (bps) reduction against 25 bps cut in repo rate, latest RBI data showed.
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“After comparing yields of different rated papers with corresponding MCLR of banks in the current cycle, yields of higher-rated papers are more lucrative for borrowing via the bond market as compared to MCLR rates of banks,” Madan Sabnavis, chief economist of Bank Of Baroda (BoB) said in a report. “However, bank credit can be a preferred choice for lower-rated companies,” he said. MCLR rates for tenures of one year at public sector banks stood at 9.08% in May, versus a rate of 6.80% for a AAA-rated company, according to the BoB report.
