Indian issuers are putting bond sales on hold as rising domestic yields and heavy state government supply at elevated levels weigh on demand.
Mindspace Business Parks REIT and National Bank for Agriculture and Rural Development are said to have postponed their planned bond sales, after Bajaj Finance and Housing and Urban Development Corp scrapped Rs80bn (US$908m) of deals in the week ended August 29 as they were reluctant to match the high yields in the rupee market, according to market sources.
Mindspace and Nabard did not immediately reply to emails seeking confirmation of their plans.
The higher supply of securities from state governments that are trying to fund their deficits, worries over a higher fiscal deficit after the government cut taxes on various consumer products to boost consumption from September 22, and the US's imposition of 50% tariffs on Indian goods are casting a pall over the domestic bond market.
"Frequent issuers in the rupee bond market remain on the sidelines, with some shelving issuance plans after weak bidding," said Deepak Sood, head of fixed income at investment firm Alpha Alternatives. "Domestic yields climbed across the curve in August, while heavy state-government supply is further crowding out private borrowers."
India's three, five and 10-year AAA PSU (public sector undertaking) benchmarks have each climbed 26bp since the beginning of August, to 6.96%, 7.06% and 7.28%.
On September 2, 12 state governments raised Rs291bn through bond auctions, compared with the targeted Rs316.5bn, the largest volume of state government securities issuance in a single day in the financial year that began on April 1.
Rating agency Icra estimates gross SGS issuance at close to Rs12trn in FY 2026, up from Rs10.7trn in the previous year.
Investors switch to SGS
The higher spreads available over central government securities make SGS an attractive proposition for investors compared with corporate bonds.
"If you look at the market today, the spreads between 10-year government securities and 10-year AAA PSU corporate bonds have compressed as there is hardly any corporate bond supply," said Gautam Kaul, senior fund manager for fixed income at Bandhan Asset Management.
The spread between 10-year AAA PSU corporate bonds and 10-year government securities has shrunk to 65bp as of September 2, according to LSEG data.
Meanwhile, the weighted-average cutoff yield for bonds from state governments was 7.54% on Tuesday, the highest since February 2024. As a result, the spread between the cutoff yield for 10-year SGS and 10-year government bonds has climbed to a post-pandemic high of 109bp, Icra said in a note.
"At the longer end, state government securities are trading at similar or in some cases at a higher yield than AAA PSU bonds, so to some extent, investors may be switching from bonds to state government securities, depending on their flexibility or fund mandate, as they are getting a sovereign bond at a higher yield compared with AAA PSU bonds," said Kaul.
SGS, which are issued through auctions conducted by the Reserve Bank of India, do not carry domestic ratings.
Offshore supply kicks off
Meanwhile, some Indian issuers have begun tapping the offshore US dollar bond market after a prolonged lull.
"Issuance is supported by tighter spreads following dovish signals from the US Federal Reserve and the S&P upgrade of India’s sovereign rating," said Sood at Alpha Alternatives.
Summan Capital, Muthoot Finance and State Bank of India have raised a total of US$1.4bn since S&P upgraded India's sovereign rating to BBB from BBB– on August 14.
Hero Fincorp is said to be in talks with HSBC and Standard Chartered for a potential sale of US$300m of bonds with a tenor of three to four years after it conducted non-deal roadshows in Singapore and Hong Kong in the week ended June 20. The issuer did not confirm if it will hit the market immediately.
Indian Oil Corporation is also rumoured to be exploring US dollar bonds, according to market sources.
However, India may not see a wave of US dollar bond issuance. "The all-in funding costs — once hedging and withholding tax are considered — still do not make dollar bonds too attractive," Sood said.