Large Corporates Shift to Bonds as RBI Rate Cuts Make Market Borrowing More Lucrative

Mumbai, 6 August 2025: Indian corporates are increasingly turning away from traditional bank loans and embracing the bond market, capitalising on the faster policy transmission in money and debt markets. According to the Reserve Bank of India (RBI), market-linked borrowing through commercial papers and corporate bonds has gained momentum as companies seek greater financial agility and lower costs amid the current interest rate environment.

Commercial Paper Issuances Surge to ₹0.78 Lakh Crore in Q1FY26 as Firms Seek Cheaper Credit

With monetary policy transmission happening more swiftly in money markets than in bank lending, large companies are opting for instruments that offer faster interest rate alignment. In the RBI’s recent monetary policy announcement, Governor Sanjay Malhotra noted a significant shift in corporate funding behaviour, stating that commercial papers (CPs) and corporate bonds are becoming the preferred financing tools for India Inc.

The Monetary Policy Committee has kept the repo rate steady at 5.5%, yet corporate entities are increasingly looking beyond traditional lending channels due to quicker yield adjustments in the bond market.

Bank Credit Growth Slows to 12.1% in FY25 but Overall Funding Touches ₹34.8 Lakh Crore

Despite a drop in bank credit growth—which fell from 16.3% in FY2023–24 to 12.1% in FY2024–25—the overall financial resource flow to the commercial sector climbed to ₹34.8 lakh crore, up from ₹33.9 lakh crore in the previous fiscal year.

However, there was a notable decline in non-food bank credit, which contracted by nearly ₹3.4 lakh crore, falling from ₹21.4 lakh crore to ₹18 lakh crore year-on-year. This suggests that although banks are lending less, alternative funding sources are more than compensating for the shortfall.

Corporate Bond Issuances Jump Tenfold to ₹0.95 Lakh Crore in Q1FY26 Amid Lower Costs

The most striking evidence of this funding shift lies in the first-quarter data of FY2025–26:

• Commercial Paper (CP) issuances rose to ₹0.78 lakh crore, a sharp increase from ₹0.30 lakh crore in Q1FY25.
• Corporate bond issuances soared to ₹0.95 lakh crore, up dramatically from just ₹0.09 lakh crore in the same period last year.

These figures reflect a strategic pivot by companies toward instruments that offer better pricing and operational flexibility, thanks to a more responsive bond market.

Internal Accruals Strengthen as Profitable Sectors Fund Growth In-House

Besides market instruments, large corporates are also depending more on internal accruals to fuel their expansion. As profitability improves across core industries, businesses are deploying retained earnings as a low-cost, risk-free capital source. This trend underscores the financial resilience and self-sufficiency of well-performing firms.

Monetary Policy Support: Repo Rate Cut by 100 bps Boosts Bond Market Appeal

The RBI has implemented a 100 basis point cut in the repo rate since February 2025, which has translated swiftly into the debt markets. The Weighted Average Call Rate (WACR), Treasury Bill yields, and corporate bond rates have all seen meaningful declines, making it easier for firms to raise capital outside the banking system.

According to the RBI, even as bank-led credit slows, the financial markets have seamlessly filled the gap, aided by stable liquidity conditions and a subdued inflation outlook.

This evolving borrowing landscape signals a broader structural change in India’s corporate finance ecosystem, with the debt market taking on a larger role in capital formation. As the RBI continues its accommodative stance and market instruments prove more efficient, this trend is likely to gather further momentum in the months ahead.

REF:  https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR8429E6D026EE7CE433D9D877AAC842A8166.PDF

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