Bond market shrugs off RBI rate cut, PSU fundraisings hit pause

Market participants say the pullbacks reflect broader stress across the yield curve rather than concerns specific to individual issuers

A widening gap between the Reserve Bank of India's monetary policy signals and bond market behaviour is prompting state-owned borrowers to pause planned fundraisings, Mint reports.

On Monday, Indian Railway Finance Corporation (IRFC) became the third public sector entity-after Power Finance Corporation (PFC) and Small Industries Development Bank of India (Sidbi)-to pull a bond issue within the span of a week. The move underscores the mounting pressure from rising yields despite the RBI's recent rate cut, Mint notes.

IRFC withdrew its proposal to raise up to Rs 5,000 crore through zero-coupon bonds after investor appetite proved weak at the pricing levels it was seeking. Three merchant bankers told Mint that bids came in at higher yields than the issuer was willing to accept.

Data from the bid book accessed by Mint showed that IRFC received bids worth more than Rs 4,461 crore for its 10-year zero-coupon bond, with yields ranging between 6.63 per cent and 7.23 per cent. The company had been targeting a yield of around 6.8 per cent, with a cut-off closer to 7.23-7.25 per cent, but chose to withdraw the issue amid limited interest at tighter levels.

The IRFC decision followed similar actions last week by other PSU borrowers. PFC shelved plans to raise up to Rs 3,500 crore through 15-year bonds, while Sidbi withdrew its proposal to mobilise up to Rs 8,000 crore via bonds maturing in November 2029, as both failed to secure acceptable pricing, merchant bankers told Mint on condition of anonymity.

Sidbi had expected to raise funds at around 6.8 per cent, but bids were closer to 6.9 per cent. PFC, meanwhile, dropped its issue after bids came in near 7.18 per cent, above its expectation of roughly 7.1 per cent, Mint reported.

Market participants told Mint that the pullbacks reflect broader stress across the yield curve rather than concerns specific to individual issuers. Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP, said a mix of rupee depreciation, lingering global uncertainty, subdued foreign portfolio inflows and a heavy pipeline of long-tenor government borrowing has kept upward pressure on yields.

Srinivasan added that IRFC's decision should be seen as an exercise in market discipline rather than a retreat. Accepting materially higher yields, he said, could have undermined the credibility of earlier issuances, unsettled existing investors and distorted price discovery in the still-developing zero-coupon bond segment, Mint noted.

A zero-coupon or deep-discount bond is issued at a steep discount-typically more than 20 per cent-to its face value. IRFC had received government approval in May to issue zero-coupon bonds worth up to Rs 10,000 crore. So far, it has raised Rs 2,982 crore through a late-November tranche of 10-year zero-coupon bonds at a cut-off yield of 6.8 per cent, against an initial plan to borrow Rs 4,000 crore in that round, Mint reported.

An email sent by Mint to IRFC seeking comment did not receive a response till press time.

The recent withdrawals highlight how market sentiment can overpower policy intent. Srinivasan told Mint that despite the RBI cutting the repo rate, benchmark government bond yields have hardened instead of easing, dragging corporate borrowing costs higher almost in tandem.

Since the RBI's monetary policy announcement on December 5-when the MPC reduced the repo rate by 25 basis points to 5.25 per cent-the yield on the benchmark government bond has risen by about 10 basis points to 6.59 per cent, Mint noted. Government bond yields serve as the benchmark for corporate debt pricing.

Madan Sabnavis, chief economist at Bank of Baroda, told Mint that the historical gap between the repo rate and the 10-year government bond yield has typically been around 80-100 basis points, but has now widened to about 134 basis points.

V.R.C. Reddy, head of treasury at Karur Vysya Bank, explained to Mint that while policy rate cuts tend to influence short-term rates quickly, long-term bond yields are shaped by liquidity conditions, fiscal supply, inflation risks and investor balance sheet constraints. Until liquidity improves meaningfully and supply pressures ease, he said, bond yields may continue to diverge from policy signals.