The Impact of Rising Bond Yields

In a noticeable shift, Indian companies and financial institutions significantly scaled back their short-term borrowing from the debt market in August. A leading factor behind this move is the hardening of bond yields, which has made debt markets more expensive for borrowers. In total, ₹1.18 lakh crore was raised through commercial papers (CPs) in the month, as per Reserve Bank of India data.

Month-on-Month Decline

The decrease in borrowing was substantial, showing a 23% drop from the previous month and a 12% decrease compared to the same period last year. This trend reflects the broader shift in the financial landscape, as bond yields on 10-year benchmark government dated stock rose by 26 basis points to 6.62% towards the end of August.

The bond yield scenario in August contrasts with the preceding months. For instance, in April, the yield hovered between 6.32% and 6.50%, indicating a less pressurized environment for short-term borrowing. The softer period for borrowers was highlighted when the yield spiked 6.75% in March.

Options Outside the Debt Market

With the debt market becoming increasingly costly, bankers and financial institutions are anticipating a pivot back to traditional banking for immediate cash needs. Lenders such as Canara Bank and Indian Bank are readying a sizeable corporate loan pipeline to disburse as demand increases.

The Role of RBI’s Monetary Policy

The Reserve Bank of India played a crucial role, having overseen a softer interest rate cycle beginning in February. The reduction included a cumulative 100 basis points cut, albeit not all of it seems to have been transmitted efficiently to the credit market, where lending rates for fresh loans only saw a 71 basis points cut.

A Broader Outlook

Despite a recent pause in the RBI’s August policy on rate cuts, the first quarter volume for this year reflects ₹4.54 lakh crore in issuance, pointing out a gradual change. The hope remains that traditional banks will step into the void left by a challenging debt market, as corporates reassess their financial strategies. According to The Economic Times, this shift back to banks for short-term funding might fortify the banking sector while offering companies a more stable borrowing environment.