Whalesbook
Corporate Treasury Pivots to Bonds
This significant shift in how companies manage their cash shows a move towards fixed-income investments. It’s driven by a mix of global market trends and India's economic strength. While corporate earnings continued to grow strongly, companies reduced their equity investments by 62.25%, signaling a preference for stability and predictable returns in the current economic climate.
Index Inclusions Fuel Bond Rally
Private companies invested a record ₹35,981 crore in bonds and debentures in FY25, a sharp increase from just ₹224 crore in FY24. This happened as investments in equities fell 62.25% year-on-year to ₹59,945 crore, and mutual fund allocations dropped to ₹3,656 crore. Foreign investor inflows significantly boosted India's bond market, especially government securities, following JP Morgan’s index inclusion announcement in late FY24 and its actual inclusion in June 2024. Bloomberg’s Bond Index inclusion also added momentum, lifting bond prices. Corporate bond issuances grew to ₹9.87 lakh crore in FY25, from ₹8.38 lakh crore the prior year, with yields typically between 6.5% and 15%. This offered a strong alternative to equities, where the Nifty 50’s implied earnings yield was about 4.5% in January 2025.
Bond Market Growth and Key Factors
India's corporate bond market has grown considerably, with net outstanding bonds increasing at a Compound Annual Growth Rate (CAGR) of about 12% from FY14 to FY25, reaching ₹53.6 trillion by March 2025. Issuances hit a record in FY25, surpassing ₹9.9 trillion. Foreign portfolio investment (FPI) in corporate bonds rose to ₹1.21 trillion in FY25, up 11.4% from FY24, largely due to index inclusions expected to draw significant passive investment. While these inflows are crucial, they can also cause volatility, as seen in the India-US 10-year bond yield spread narrowing to 227 basis points by December 2024 – a key factor for foreign investors. The services sector was particularly strong, boosting profit margins and return on equity in FY25, which supported higher bond investments. Analysts expect stable interest rates in 2026, favoring short-to-medium term bonds, and a continued move from bank lending to market-based funding.
Risks and Warning Signs
Despite the strong growth, structural weaknesses and risks call for caution. Companies are relying more on external funding, which rose to 53.6% in FY25, mainly from current liabilities, indicating potential short-term cash flow issues. While earnings grew, operating expenses also increased, affecting profit margins in some sectors. The wide yield range of 6.5-15% on corporate bonds highlights significant differences in credit risk, with bonds below BBB rating often considered uninvestible. Reports of Nomura investigating possible profit inflation on its India bond trading desk also raise questions about market integrity. Foreign capital, while helpful, can reverse quickly due to global economic changes or currency shifts. The corporate bond market, though growing, remains a smaller part of total financing compared to developed nations.
Outlook for Corporate Bonds
Corporate bond issuances are forecast to reach around ₹11 trillion in FY26, suggesting continued market growth. The Reserve Bank of India's (RBI) focus on market development and ongoing global index inclusions should attract more foreign capital. While analysts expect stable interest rates in 2026, favoring bond investments, the market will remain sensitive to global liquidity and domestic credit risks.