However, deviations can occur. Although the RBI cut the repo rate by 100 basis points between February and June this year, there was no significant decline in corporate bond yields in the second half of the current year (H2CY25). In October, bond yields fell marginally for most maturities, but there was no decline in previous months. In the case of government bonds, the yield on 10-year G-Secs hardened in August and September, from 6.32% on June 30 to 6.57% on September 30.
It is interesting to know what keeps corporate bond yields at a high level. The two main reasons are the continued concerns over US punitive tariffs and the shift in the RBI’s stance from ‘accommodative’ to ‘neutral’. The central bank’s decision has effectively dashed investors’ hopes for further immediate interest rate cuts.
The third factor is the bond issuance volume. Looking at the dynamics of corporate bond supply, an ICRA report shows that bond issuance has fallen to Rs 2.7 trillion in Q2FY26, compared to Rs 3.6 trillion in Q1FY26. In the second quarter of the previous fiscal year (Q2FY25), total issuance stood at Rs 3.0 trillion. The current issuance in the second quarter can therefore be considered ‘reasonably high’. When bond issuance increases, investor interest will decrease, potentially causing bond yields to rise.
Looking ahead, ICRA has revised its estimate of bond issuance in FY26 at Rs 12.0-12.4 trillion from the earlier estimate of Rs 11.1-11.7 trillion, with the caveat that increased supply of corporate bonds could lead to a hardening of interest rates. The fourth element is the slow transmission of monetary easing. When the central bank cuts its repo rate, it is expected to reduce bank loan rates, deposit rates and bond yields. If transmission is slow, bond yields may remain high, as high market borrowing costs will force companies to hold new issuance at a low level, and liquidity constraints will prompt investors to take a wait-and-see approach. Patchy or slow monetary transmission not only keeps bond yields high, but also makes bank loans expensive for companies. Thus, it negatively affects corporate credit growth and private capital expenditure. Any indication from the central bank in favor of a rate cut will have a softening effect on bond yields. With headline inflation currently well below the RBI’s tolerance limit of 4%, investors are hopeful of a rate cut at the December MPC meeting. ICRA estimates that a final rate cut of 25 basis points (bps) is possible at the December meeting, with its certainty depending mainly on GDP growth and inflation data.
However, many note that we are now closer to the end of the monetary easing cycle. Historically, this phase behaves very differently from the early easing period. As policy rates approach their cyclical lows, bond yields tend to level off or even rise marginally as markets look ahead and start pricing the next phase early.
Also read: India’s successful 8.2% GDP growth in Q2 exceeds expectations. But is it enough to boost the markets?
The outlook for corporate bonds in particular is largely positive. They normally offer a premium of 80-90 basis points over government bonds (G-Sec), which is a reward for the credit risk borne by investors. These attractive spreads, India Inc’s robust earnings growth, stellar GDP growth and the possibility of future rate cuts make corporate bonds an attractive asset class.
(The author is CEO, Quest Investment Managers)
(Disclaimer: The recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of The Economic Times.)
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