PSU Bond Issuances Hit Pause as Market Yields Refuse to Cool
India’s public sector borrowers are pressing the pause button on bond fundraisings, even after the Reserve Bank of India cut interest rates. A growing gap between RBI’s monetary policy signals and actual bond market behaviour is making borrowing more expensive than expected, forcing major state-owned institutions to rethink their plans.
Over the past week alone, three large public sector entities have withdrawn bond issues, highlighting stress across the yield curve rather than problems specific to individual issuers.
IRFC Joins PFC and Sidbi in Withdrawing Bond Issue
Third PSU Withdrawal in Just One Week
On Monday, Indian Railway Finance Corporation Ltd became the third public sector issuer in a week to pull back a planned bond issue. Earlier, Power Finance Corporation and the Small Industries Development Bank of India had also cancelled their fundraising plans.
IRFC had planned to raise up to ₹5,000 crore through a 10-year zero-coupon bond. However, limited investor appetite at the pricing the company was comfortable with forced it to withdraw the issue.
What Went Wrong With IRFC’s Issue
According to merchant bankers involved in the deal, IRFC was expecting a yield of around 6.8 percent. But bids came in at significantly higher levels.
The bid book showed demand of about ₹4,461 crore, with bids ranging from 6.63 percent to as high as 7.23 percent. The cut-off yield was expected to fall between 7.23 and 7.25 percent, which IRFC found unattractive.
Rather than accept higher borrowing costs, the company chose to step back.
PFC and Sidbi Faced Similar Pricing Pressures
PFC’s 15-Year Bond Plan Scrapped
Power Finance Corporation had planned to raise up to ₹3,500 crore through 15-year bonds. The company was targeting a yield of around 7.1 percent but received bids closer to 7.18 percent.
With pricing overshooting expectations, PFC decided to cancel the issuance.
Sidbi’s Short-Term Bond Issue Also Pulled
Sidbi faced similar challenges while attempting to raise up to ₹8,000 crore through bonds maturing in November 2029. The lender was hoping for yields near 6.8 percent but saw bids closer to 6.9 percent.
While the difference may appear small, even minor increases in yield can significantly raise borrowing costs for large issuances, prompting Sidbi to withdraw.
Why These Withdrawals Matter
Not Issuer-Specific, But Market-Wide Pressure
Market participants believe the cancellations reflect broader pressures in the bond market rather than doubts about the credit quality of PSU issuers.
Experts say the yield curve is under stress due to multiple macroeconomic factors, making investors demand higher returns even from highly rated government-backed entities.
Market Discipline Over Forced Borrowing
Analysts say IRFC’s decision to withdraw its bond issue should be seen as disciplined rather than defensive.
Accepting materially higher yields could have undermined pricing credibility, unsettled existing investors, and distorted price discovery in the relatively new zero-coupon bond segment.
Understanding Zero-Coupon Bonds
What Are Zero-Coupon Bonds
Zero-coupon bonds, also known as deep-discount bonds, are sold at a steep discount to their face value and do not pay periodic interest. Investors earn returns through the difference between the purchase price and the redemption value.
Such bonds are sensitive to yield movements, making pricing particularly challenging when market sentiment is volatile.
IRFC’s Special Approval for ZCBs
IRFC received government approval earlier this year to issue zero-coupon bonds worth up to ₹10,000 crore. In late November, it successfully raised ₹2,982 crore through a 10-year ZCB at a cut-off yield of 6.8 percent.
However, this was lower than the originally planned ₹4,000 crore for that tranche, indicating cautious investor participation even then.
RBI Rate Cut Fails to Lift Bond Market
Repo Rate Cut Did Not Ease Long-Term Yields
The Reserve Bank of India cut the repo rate by 25 basis points to 5.25 percent on December 5. Traditionally, such a move is expected to pull bond yields lower.
Instead, the yield on the benchmark 10-year government bond has risen by about 10 basis points since the policy announcement, touching around 6.59 percent.
Why Government Bond Yields Matter
Government bond yields act as the benchmark for corporate borrowing. When these yields rise, borrowing costs for companies, including PSUs, automatically increase.
This has kept pressure on corporate bond pricing despite the RBI’s easing move.
Growing Disconnect Between Policy and Market
Repo Rate and 10-Year Yield Gap Widens
Historically, the gap between the repo rate and the 10-year government bond yield has been around 80 to 100 basis points. Currently, this gap has widened to about 134 basis points.
Economists say this indicates weak transmission of monetary policy to long-term rates.
RBI’s Signals on Liquidity Interpreted Cautiously
Yields began hardening after the RBI clarified that open market operations should be viewed as liquidity-enhancing measures rather than tools to directly influence bond yields.
This signalled to the market that the central bank may not actively intervene to cap long-term yields.
Why Bond Yields Remain Under Pressure
Multiple Factors Driving Yields Higher
Experts point to several reasons for stubbornly high yields:
- Rupee depreciation raising inflation concerns
- Global economic uncertainty
- Weak foreign portfolio investor inflows
- Heavy government borrowing across longer tenors
Together, these factors are outweighing the impact of the repo rate cut.
Supply and Demand Imbalance
There are also worries about a surge in state government bond issuance in the final quarter of the year. At the same time, demand from large institutional investors such as insurance and pension funds remains subdued.
This imbalance is keeping yields elevated.
Liquidity Still Tight in the System
Short-Term Rates React, Long-Term Rates Do Not
While policy rate cuts influence short-term rates quickly, long-term bond yields depend on broader conditions such as liquidity, fiscal supply, inflation risks, and balance sheet constraints.
Until liquidity improves meaningfully and supply pressure eases, yields may not align with policy signals.
Investors More Comfortable Taking Risk
Market experts note that unlike earlier crises, investors are currently more comfortable taking risk in equities and other assets. Bonds are no longer the automatic safe haven, reducing demand.
Bank Loans Add to Bond Market Competition
Loans Becoming More Attractive
Another factor dampening bond market demand is competitive pricing in bank loans. The weighted average lending rate on fresh rupee loans stood at 8.64 percent in October, lower than earlier months.
For many borrowers, bank funding is becoming a more viable alternative to bond markets.
What This Means for PSU Borrowers
Fundraising Plans May Be Deferred
With yields staying higher than expected, PSU issuers may defer bond issuances and tap the market only when pricing becomes more favourable.
Some may explore alternative funding routes or shorter tenors to manage costs.
Market Conditions to Dictate Timing
Going forward, bond issuances will likely depend more on market conditions than on policy signals alone. Borrowers may wait for clearer signs of liquidity easing or improved investor appetite.
The recent withdrawal of bond issues by IRFC, PFC, and Sidbi highlights a clear disconnect between RBI’s rate cut and bond market realities. While monetary policy has turned supportive, bond yields remain stubbornly high due to liquidity concerns, heavy supply, global uncertainties, and muted investor demand.
For now, PSU borrowers appear unwilling to compromise on pricing, choosing market discipline over costly fundraisings. Until bond market sentiment improves, rate cuts alone may not be enough to revive issuance activity.
