Offshore Debt Falls Sharply as Funding Costs Rise

Fundraising through overseas bonds by Indian corporations fell sharply in fiscal year 2026, dropping by 43% to $4.9 billion from $7 billion in the preceding year. This significant retreat from international debt markets is primarily a response to a combination of rising geopolitical tensions and currency depreciation. The Middle East crisis and ongoing trade disputes increased global uncertainty, driving up hedging costs for Indian borrowers. Global interest rates also stayed high due to slower-than-expected central bank rate cuts, reducing the usual cost benefit of borrowing overseas. By early April 2026, the rupee was trading around 93 against the US dollar, showing its weakness over the year.

Domestic Funding Becomes More Attractive

The higher costs of offshore borrowing have changed how companies view funding. Elevated global base rates, combined with a significant rise in rupee hedging costs—estimated to have increased by 40-50 basis points since regional conflicts intensified and possibly more over the fiscal year—mean overall costs for foreign borrowing may now be similar to or higher than domestic options. For high-grade Indian corporate debt, domestic financing typically ranges from 8-9% for top issuers. This dynamic is particularly challenging for non-banking financial companies (NBFCs), for whom international markets often serve as a key way to diversify funding, a strategy that has now become too costly. The broader Indian equity market, represented by the BSE Sensex, traded with a P/E ratio around 27x and a market capitalization near $4.5 trillion by early 2026, indicating a solid domestic financial market that could potentially absorb more capital if overseas markets remain unattractive.

Past Trends and Global Market Shifts

Companies pulling back from offshore markets is not new. During past periods of significant rupee depreciation and geopolitical stress, Indian firms with large unhedged foreign currency debts faced significant pressure, leading to higher borrowing costs and potential impacts on profits and finances. The current scenario also reflects wider trends in emerging markets, where geopolitical risks have made investors demand higher returns, increasing borrowing costs for many. Global investors are now more cautious, moving capital away from areas seen as riskier.

Persistent Risks Remain

Despite the shift towards domestic funding, significant risks remain. The primary concern is the volatility of the Indian rupee. Should geopolitical tensions escalate further or global economic conditions worsen, the currency could face renewed depreciation, making existing foreign debt more costly for companies that haven't fully hedged. Unlike some developed nations or Asian economies with lower foreign debt or stable currencies, Indian companies, especially NBFCs, are more exposed to currency swings on their debts. Past instances highlight how rapid rupee depreciation can quickly turn a potential funding benefit into a major financial problem, affecting debt payments and profits. Close monitoring of foreign exchange exposure and hedging will be crucial, especially if currency swings worsen. Market watchers are looking for signs of easing global conflicts or a better currency outlook that would encourage a return to offshore debt markets. Analysts generally recommend caution, focusing on strong currency risk management and using domestic credit markets.

Future Borrowing Depends on Stability

Looking ahead, a rebound in overseas borrowing by Indian firms depends on stable geopolitical conditions and a more positive outlook for the rupee. Until such time, the preference is likely to remain with domestic funding channels, supported by the strength of India's financial sector and corporate finances, which have generally improved in quality and growth. However, a prolonged global economic slowdown could hurt domestic demand and company profits, affecting the credit climate.