Benchmark 10-year government bond yields have increased by 100 basis points in two months, signaling higher borrowing costs across the economy. The Reserve Bank of India’s decision to reject treasury bill auction bids highlights rising liquidity pressure. Companies are now paying higher interest premiums, while banks are expected to pass on these increased costs to retail and corporate borrowers soon.
The domestic bond market is seeing a rapid change as the yield on the benchmark 10-year government bond has climbed by 100 basis points over the last two months. This sharp rise in yields, which moves in the opposite direction to bond prices, is making debt more expensive for both the government and private entities. The Reserve Bank of India (RBI) recently intervened in the market by rejecting all bids at a treasury bill auction, a move that signals the central bank’s resistance to the market's demand for higher returns during this period of tight liquidity.
This shift in interest rates is impacting corporate fundraising plans significantly. Public sector units, which typically enjoy lower borrowing costs, are now paying approximately 70 basis points more for five-year funding compared to levels seen just two months ago. The environment is even more challenging for private sector companies with lower credit ratings. These firms are now required to offer premiums between 100 and 150 basis points above the sovereign rate to attract interest from investors. As a result, many corporations have put their bond market fundraising plans on hold, while municipal corporations are seeking alternative financing options to manage their budgets.
The banking sector is also navigating the impact of this volatility. Banks hold large portfolios of government securities, and as yields rise, the value of these bonds falls, leading to paper losses on their treasury portfolios. While the weighted average lending rate was recorded at 8.61 percent as of August, banks are now preparing to increase interest rates on retail and corporate loans. With loan demand remaining steady, lenders are increasingly likely to pass these higher borrowing costs on to consumers in the coming months. The transmission of tighter monetary policy is accelerating, and the era of low-cost borrowing is showing signs of closing, placing pressure on both individual and business borrowers across the country.