RBI may delay rate cuts, strong bond demand keeps market rates low

Mumbai: The Reserve Bank of India may delay the expected policy interest rate cuts, but strong demand for bonds from long-term investors such as retirement funds and insurers will ensure that market interest rates are low, especially for the top-rated borrowers.

Bond issuances by financial institutions and public financial institutions are expected to gain momentum, while corporate bond issuances will moderate due to general tepid demand in the first quarter of any fiscal, according to a report by India Ratings. “The fading hope for a deeper policy rate cut will favour the elevated rates in the banking system,” said Soumyajit Niyogi, director at India Ratings. “On the other hand, a strong demand from institutional investors such as insurance, EPFO will keep bond yields at the lowest, especially for high-rated issuances.”

Strong cash flow and a healthy equity market have been limiting credit demand from corporates creating room for other financial entities to tap into multiple financing channels and borrowing at finer rates, the rating agency said. This moderate demand for funding will keep the rates for commercial paper (CP) stable, but elevated due to strong credit demand and tight banking system liquidity.


“Sustained pressure on lending rates amid favourable financing conditions in the bond market has been driving bond issuances. While corporate bond issuances are likely to remain modest, issuances by financial institutions and public finance institutions are expected to gain further traction,” said Niyogi.

CP issuances had improved both in terms of volume and value and had hit a four-year high of 1.2 lakh crore in January-March 2024 as NBFCs sought diversification in funding. The surge in activities in March 2024 was also due to an improvement in the banking system liquidity.

“The deposit rate in the banking system has peaked out and as a consequence, banks’ lending rate is expected to be at an elevated level in FY25, barring modest softening towards the end,” said the report. CP and certificates of deposit rates might ease in sync with the easing of liquidity conditions and a constructive view on rates.