Bond market volatility sends corporates back to banks

Mumbai: Indian companies are increasingly turning to bank loans as yields on corporate bonds have risen sharply, while interest rates on credit have remained steady. The shift also reflects changing expectations around the interest-rate cycle, with markets pricing in the possibility of higher policy rates ahead.

The altered funding preference is also visible in the corporate loan growth during the fourth quarter for most Indian banks that had hitherto relied on burgeoning consumption demand - and, consequently, retail credit - to expand their businesses.

Yields on three-year corporate bonds rose nearly 80 basis points to 7.95% in the fourth quarter while the marginal cost of lending rate (MCLR) - the internal benchmark for loans - at the system level remained stable around 8.40%.


"Yields have moved higher as markets increasingly price in risks arising from the ongoing geopolitical tensions," said Soumyajit Niyogi, director, India Ratings Research.

War Impact on Bond Market
"In this environment, fixed-rate corporate bond borrowing costs have, in several cases, moved much above comparable bank funding rates, especially for corporates rated lower than AA+ or AAA."

Corporate bond issuances fell 63% on year in April, as wholesale lending growth accelerated sharply across the banking sector. HDFC Bank's wholesale loans grew 13% in Q4FY26, compared with 3.6% a year earlier, while Axis Bank reported 38% growth versus 8% in the corresponding period last year. State Bank of India's (SBI) wholesale loans climbed 15% in Q4FY26, versus 9% last year. Over the last year, the 10-year benchmark government bond yield has risen 90 basis points to 7.12% despite the central bank lowering policy rate by 125 bps. However, the sharpest rise in yields - by 45 basis points to 7.03% - was in the last quarter of the fiscal year, largely driven by the West Asia war.

Market Yields Climb
Sovereign bonds serve as the benchmark for pricing corporate debt, meaning higher sovereign yields have translated into a sharp increase in corporate borrowing costs as well. The one-year MCLR rate stood at 8.40% in March 2026 and has remained stable mainly because in Q4 as it is calculated on the basis cost of deposits. Deposit rates stood at 5.66% in Q4, central bank data showed.

Companies are turning to banks for lower near-term volatility in borrowing costs, greater flexibility in negotiated pricing and stronger funding certainty compared with increasingly volatile debt markets.

"Many borrowers are reluctant to lock themselves into high fixed-rate bond issuances at prevailing yields," said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap, a debt advisory firm. "Instead, they are increasingly opting for bank loans, where they retain the flexibility to prepay and refinance through the bond market later if yields soften and overall market conditions improve."

For AAA-rated companies, a five-year bond had a return of around 6.65% in May 2025, for 10-year paper, the rate was at 6.85% in May 2025. In May 2026, a five-year paper has an interest rate of around 7.90%, while a 10-year paper had an interest rate of 7.74%.