India's Borrowing Shift: Domestic Debt Markets Shine as Global Appetite Wanes

The Indian corporate sector is undergoing a quiet but significant shift in its financing strategy. As local bond yields hit multi-year lows and global debt markets remain volatile, companies are increasingly turning to domestic markets to meet their borrowing needs. This trend, driven by a confluence of RBI policy, narrowing yield spreads, and geopolitical uncertainties, is reshaping the landscape of corporate finance in one of Asia’s fastest-growing economies.

The Domestic Debt Market Advantage

The Reserve Bank of India (RBI) has been the catalyst for this shift. Aggressive open market operations (OMOs) and record-scale bond purchases—₹1.25 lakh crore in May alone—have pushed the 10-year yield down to a three-year low of 6.33% in April 2025. Analysts at Bank of Baroda note that yields could dip further to 6.00-6.25% by year-end, supported by surplus liquidity conditions and downward revisions to inflation forecasts.

This environment has made domestic borrowing cheaper and more accessible. Public-sector banks and mutual funds, flush with liquidity, are active buyers of government and corporate debt. For instance, a 150 basis point decline in yields since late 2024 translates to significant savings for issuers of long-term bonds. A ₹100 billion 10-year bond issued at 6.3% instead of 7.8% would save ₹1.5 billion annually in interest payments—a compelling incentive for corporates to tap local markets.

The Global Debt Dilemma

While domestic conditions are favorable, global markets present hurdles. The spread between India’s 10-year yield and U.S. Treasuries—once a key draw for foreign investors—has narrowed to 200 basis points, down from 350 basis points in early 2024. This compression, combined with geopolitical risks like India-Pakistan tensions and U.S.-China trade wars, has deterred foreign portfolio investors (FPIs).

The data underscores the trend: FPIs withdrew a record $2.27 billion from Indian debt markets in April 2025, marking the largest outflow since May 2020. Meanwhile, the rupee’s depreciation to 85.25 per dollar has added to the cost of hedging foreign currency borrowings, further tilting the balance toward local debt.

Corporate Borrowing Patterns Reflect the Shift

Indian firms are heeding these signals. Companies across sectors—from infrastructure to technology—are prioritizing domestic bond issuances. For example:
- Adani Enterprises raised ₹150 billion through a 10-year bond priced at 6.95%, a 40 basis point discount to similar issues in late 2024.
- Tata Steel opted for a ₹50 billion corporate bond at 7.10%, avoiding the 15-20% premiums often seen on dollar-denominated debt.

The preference for rupee debt isn’t just about cost. Regulatory changes, such as the RBI’s easing of restrictions on corporate bond issuance, have also streamlined access. Meanwhile, foreign investors’ focus on shorter-dated bonds (due to duration risks) has left long-term funding needs to be met domestically.

Risks on the Horizon

Despite the positives, risks linger. Near-term volatility could arise from geopolitical flare-ups or profit-taking ahead of new bond issuances. The RBI’s ability to maintain a 1% liquidity surplus of banks’ net demand and time liabilities (NDTL) will be critical to sustaining the downward yield bias.

Additionally, global macro factors—such as Federal Reserve rate decisions and commodity price swings—could rekindle currency volatility. The rupee’s stability, currently supported by RBI interventions, remains a double-edged sword: a sharp reversal could reignite hedging costs.

Conclusion: A New Era of Domestic Debt Dominance

The data paints a clear picture: Indian firms are capitalizing on historic lows in domestic borrowing costs while sidestepping the pitfalls of global markets. With yields projected to fall further and liquidity conditions favorable, the trend toward localization is likely to persist.

• Yield Outlook: The 10-year yield is on track to hit 6.25% by year-end, per IDFC First Bank analysts, driven by RBI OMOs and easing core inflation (4.5% in April).
• Corporate Savings: A 100 basis point decline in yields could save issuers ₹15 billion annually on a ₹1 trillion bond issuance, making domestic debt a no-brainer for long-term funding.
• Structural Shift: FPI outflows and geopolitical risks are accelerating a move toward self-reliance in financing—a hallmark of India’s economic trajectory.

In this environment, Indian corporates are not just borrowing locally—they’re building a resilient financial foundation for growth, insulated from the vagaries of global capital markets. For investors, the story isn’t just about yields; it’s about the emergence of a mature, self-sustaining debt ecosystem.