The relationship between the repo rate and corporate bond yields is crucial for investors, companies, and policymakers alike. In India, understanding this interplay is essential, especially given how rapidly economic conditions evolve. The repo rate, which is the rate at which commercial financial institutions borrow funds from the Reserve Bank of India (RBI), plays a vital role in shaping the broader debt market and influencing corporate bond yields.
In this article, we analyse the link between the RBI's repo rate and corporate bond yields in India. We also discuss how the borrowing costs, debt market, and repo rate impact Indian companies.
How Repo Rate Impacts Corporate Bonds
Corporate bonds are a staple of the Indian debt market, providing companies with the capital needed for expansion, operations, and other business needs. However, the attractiveness of corporate bonds largely depends on their yields, which are significantly influenced by changes in the repo rate.
1. Direct Link with Bond Yields
Corporate bond yields move inversely to bond prices. As interest rates rise (when the RBI increases the repo rate), existing bonds with lower yields become less attractive. Investors, therefore, demand higher yields on newly issued bonds to compensate for the rising interest rates in the broader economy. Conversely, when the repo rate is lowered, bond yields tend to fall as the cost of borrowing drops, making bonds with lower yields more attractive.
2. Increased Borrowing Costs
When the repo rate is increased, companies face higher borrowing costs, which can lead to higher yields on corporate bonds. This is because companies issuing new bonds must offer higher returns to attract investors who are looking for a premium that offsets the increased cost of borrowing. For example, if the RBI raises the repo rate to 5%, a company may need to issue bonds with yields of 6-7% to remain competitive in the market.
3. Corporate Health and Bond Yields
Corporate bond yields also reflect the risk associated with the issuer. When borrowing costs rise, companies with weaker balance sheets or uncertain growth prospects may face a decline in bond prices (an increase in yields), as investors demand a higher return for the perceived risk. On the other hand, well-capitalised companies may continue to issue bonds at relatively stable yields despite repo rate increases.
Repo Rate Impact on India's Debt Market
The relationship between the repo rate and the debt market is multi-faceted, influencing the market at both the macroeconomic and microeconomic levels.
1. Investor Sentiment
The debt market is highly sensitive to changes in interest rates. When the repo rate changes, investor sentiment can be swayed based on expectations of future economic conditions. If the RBI signals further rate hikes, investors may adjust their expectations of returns, leading to price adjustments across the bond market. This, in turn, impacts corporate bond yields.
2. Inflation and Bond Market Movements
The repo rate is one of the RBI’s key tools in controlling inflation. High inflation erodes the purchasing power of fixed-income returns, making bonds less appealing. When inflation expectations rise, the RBI may raise the repo rate to keep inflation in check. The increase in rates directly impacts bond yields as investors demand higher returns to offset inflation risk.
3. Credit Spreads
A rising repo rate also influences credit spreads, which are the differences between the yields on corporate bonds and government bonds of similar maturity. When the repo rate rises, credit spreads tend to widen, especially for companies with lower credit ratings. Investors demand a higher premium for taking on more risk in the form of corporate bonds, especially those from riskier sectors. Conversely, when repo rates are reduced, credit spreads often narrow as investors are willing to accept lower returns.
4. Foreign Investment and Debt Markets
Changes in the repo rate can also influence foreign investments in India’s debt markets. Higher interest rates may attract foreign investors looking for better returns on their investments, leading to an increase in capital inflows. Conversely, a reduction in rates may push foreign investors towards markets that offer better returns, causing a reduction in investments in India’s debt securities.
Recent RBI Rate Cuts to Spur Corporate Bond Issuances
In its ongoing efforts to support economic growth and revive credit demand, the RBI has implemented a series of repo rate cuts in 2025; a 25 basis points cut in April, bringing it down to 6.00%, following an earlier cut in February. These policy actions are part of a broader accommodative stance aimed at sustaining growth amid easing inflation, which moderated to 3.2% in April 2025.
As anticipated, these cuts have aided corporate borrowing, enabling Indian firms to take out more bonds to meet their funding requirements. Since April 1, 2025, Indian companies are estimated to have raised approximately $20 billion (around ₹1.7 lakh crore) from the public and private sectors through corporate bonds.
In December 2024, the RBI also increased spending to around $100 billion to improve liquidity in the banking system, making it easier to borrow money. This has particularly benefited non-banking financial companies (NBFCs) and has encouraged borrowing on short-term bonds. More than half of all new bond-securitised debt issued in May was short-term bonds maturing within five years, an increase from one-third in April.
These short-term secured bonds have become popular among investors as they have increased yields relative to government securities. For example, AAA-rated corporate bonds yield more than 80 basis points above government bonds. Likely, this situation will not change should the RBI continue implementing rate cuts, potentially up to 75 basis points by 2025.
Strategies for Corporations in Navigating Rate Volatility
To deal with the uncertainties linked to repo rate movements, companies can consider a few strategies:
- Diversify Funding Sources: Over-reliance on any one funding instrument accentuates risk when rates swing. By diversifying across bonds, commercial papers, bank loans, external commercial borrowings, etc, companies can optimise blended costs and reduce maturity mismatches. A prudent mix of fixed and floating-rate debt also provides stability.
- Issue Bonds Tactically: Indian companies should monitor the interest rate cycle closely and tap bond markets to raise long-term debt only when broader rates are at cyclical lows. This allows them to lock in cheaper financing for a significant part of the investment lifespan. Refinancing high-cost debt with new bond issuances during rate troughs also helps cut interest costs.
- Hedge Rate Risks Selectively: Sophisticated corporates can use fixed-to-floating interest rate swaps and other derivatives to offset some variability in policy rates over the medium term. While hedging helps budget the cost of capital, it involves additional costs. So, hedging tactics should be shaped by debt profile, balance sheet strength and in-house risk management expertise.
- Strengthen Credit Ratings: Building rating agency confidence through prudent financial management, transparency, and growth helps secure higher credit ratings. This insulates firms from policy rate volatility as higher-rated issuers get cheaper financing versus peers even under rising rate regimes due to favourable credit spreads.
Conclusion
The RBI’s policy outlook, as articulated in the April 2025 MPC statement, projects a growth recovery with inflation anchored near 4%, justifying the accommodative stance to sustain credit flow and economic momentum. Market expectations of further easing, possibly totaling up to 75 basis points by year-end, suggest a positive outlook for corporate bond markets and borrowing conditions. In a falling rate environment, investors are recommended to act promptly and lock in competitive FD rates and secure low-cost borrowing. It is also advised to diversify your investments, review your loan terms, and keep a close eye on further RBI policy moves to stay ahead of the curve.
