Bond Market Defies RBI Rate Cut as PSU Borrowings Are Put on Hold

Despite a repo rate cut by the RBI, borrowing costs in the bond market have hardened.

Weak investor appetite has forced several PSU issuers to pause fund-raising plans.

Bond market reaction remained muted after the RBI’s December 2025 repo rate cut, forcing PSU borrowers to withdraw bond issues amid higher-than-expected yield demands.

The Reserve Bank of India reduced the repo rate by 25 basis points to 5.25 percent at the Monetary Policy Committee meeting on 5 December 2025. The decision, detailed in the RBI MPC Resolution dated 5 December 2025, is available on rbi.org.in → Monetary Policy → MPC Resolutions. However, instead of easing, long-term yields hardened, complicating borrowing plans for public sector undertakings.

What Is the Issue: Why PSU Bond Issuances Are Being Withdrawn?

Several PSU borrowers have paused bond fund-raising after investors demanded yields higher than issuers were willing to accept. This Bond market reaction reflects broader stress across the yield curve rather than concerns about individual issuers.

Indian Railway Finance Corporation withdrew its proposal to raise up to ₹5,000 crore via 10-year zero-coupon bonds after bids came in at yields between 6.63 percent and 7.23 percent, compared with its target of around 6.8 percent, Mint reported on 9 December 2025.

PSU Issuers Pull Back as Pricing Turns Unfavourable

IRFC’s decision followed similar moves by other state-owned borrowers. Power Finance Corporation shelved plans to raise up to ₹3,500 crore through 15-year bonds, while Sidbi withdrew a proposal to raise up to ₹8,000 crore via bonds maturing in November 2029.
 

Merchant bankers told Mint that bids reflected broader market conditions. Venkatakrishnan Srinivasan of Rockfort Fincap LLP said accepting higher yields could have distorted price discovery, especially in the emerging zero-coupon bond segment.

Previous Developments: Why Yields Rose After the Rate Cut?

The RBI’s policy intent was overshadowed by market forces. Since the 5 December 2025 policy announcement, the yield on the benchmark 10-year government bond has risen by about 10 basis points to around 6.59 percent, Mint reported.

This widening gap has altered the historical relationship between policy rates and bond yields.
 

Madan Sabnavis, chief economist at Bank of Baroda, told Mint that the normal gap of 80–100 basis points has widened sharply. Analysts say this Bond market reaction reflects concerns around liquidity, fiscal supply and foreign portfolio outflows.

Reuters, in a report dated 12 December 2025, noted that foreign investors have reduced exposure to Indian bonds even as global yields softened.

What Stakeholders and Treasury Heads Are Saying?

V R C Reddy, head of treasury at Karur Vysya Bank, told Mint that policy rate cuts influence short-term rates quickly, but long-term yields depend on liquidity conditions, borrowing supply and investor balance sheets. Until liquidity improves meaningfully, bond yields may continue to diverge from policy signals.

For retail investors trying to understand why yields rise despite rate cuts, the LoansJagat article provides useful context.

Conclusion

The latest Bond market reaction shows that policy easing alone cannot lower borrowing costs. Until liquidity and supply pressures ease, PSU fund-raising may remain constrained.

Market participants will closely track RBI liquidity actions, government borrowing plans and inflation trends to assess whether bond yields can realign with policy signals in the coming months.

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