Borrowing costs in the bond market could increase in the coming months as upside risks to India's 10-year bond yield continue amid an uncertain macroeconomic environment, according to a report by Bank of Baroda (BoB).
Key Highlights
- Borrowing costs in India's bond market may rise as the 10-year bond yield faces upside risks.
- Bond spreads widened across issuer categories between March and June 2026, with NBFCs facing the highest premium.
The report said the outlook for India's 10-year bond yield remains uncertain and will depend on evolving global conditions, including war-related developments, liquidity conditions, inflation, and government borrowing. It noted that the Reserve Bank of India's current rate cycle is likely to remain cautious, even in the absence of a rate hike - a stance that, according to the report, is expected to keep upside risks to India's 10-year bond yield persisting.
"In that case, coupled with uncertain macro conditions the risk premium for different entities is also likely to be higher and have a bearing on these bond spreads," the report said. According to BoB, bond spreads across different categories of issuers increased broadly between March 2026 and June 2026, indicating a rise in the premium investors demand over risk-free government securities.
A bond spread is the difference in yield between two different bonds, usually measured in basis points. It is primarily used by investors to measure the relative risk, value, and return potential of one fixed-income asset compared to another.
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PFBs, NBFCs, and Corporates: How Spreads Compare
The spreads on bonds for PSU FIs & Banks (PFBs), NBFCs, and Corporates indicate how the risk premium has evolved over time. These spreads are benchmarked to the risk-free GSec, though the report noted that beyond yield movements, the business environment at both macro and micro levels also holds important cues for the direction of spreads.
Among different borrowers, Public Sector Financial Institutions and Banks (PFBs) continue to have the lowest spreads, reflecting their status as institutions either owned by the government or considered similar to government institutions. Corporate borrowers have slightly higher spreads than PFBs, though the difference remains relatively narrow and varies across credit ratings, with the report noting that individual companies' financial performance, along with industry and overall business conditions, plays an important role in determining these spreads.
NBFCs Face the Highest Borrowing Premium
The report found that Non-Banking Financial Companies (NBFCs) continue to face the highest borrowing premium in the bond market, attributing this to higher risk perception associated with the sector and the fact that NBFCs account for 60-70% of bond issuances in the market.
Outlook
Looking ahead, the report said borrowing costs in the bond market could rise further if India's 10-year bond yield moves higher and macroeconomic uncertainty persists - a scenario that would have implications across issuer categories, but particularly for higher-risk borrowers like NBFCs.
