Debt Capital Markets Expected to Cool in 2026 as Rising Yields Make Bank Loans More Attractive

Domestic institutions maintained their dominance in India's debt capital markets throughout 2025, with major banks securing top positions in deal arrangements. Market experts now anticipate a cooling period ahead as rising bond yields shift corporate borrowing preferences toward traditional bank loans.

Market Leadership and Performance

Axis Bank retained its position as the leading debt capital markets arranger, commanding significant market presence alongside other major players.

The overall debt capital markets recorded total deals worth ₹135.00 lakh crore in calendar year 2025, representing a 5% growth compared to the previous year. This performance demonstrates the continued strength of domestic institutional participation in debt arrangements.

Interest Rate Environment and Market Dynamics

The Reserve Bank of India implemented significant monetary policy changes over the past 11 months, reducing policy rates by 125 basis points in total. The repo rate currently stands at 5.25% following this easing cycle. The most recent adjustment was a 25 basis point cut implemented in December.

Despite these rate reductions, bond market dynamics have shifted unfavorably. The 10-year benchmark yield has risen by 15 basis points following the latest RBI rate cut, closing at 6.61% on Tuesday. This yield movement has created a challenging environment for corporate bond issuances.

Industry Outlook for 2026

Neeraj Gambhir, head of treasury and markets at Axis Bank, provided insights into market expectations: "We saw a robust year in 2025. With the spread between state and central government bonds widening, bond markets may be less attractive going forward, and although 2026 should still be strong, it is unlikely to be as robust as 2025."

ICICI Bank's perspective aligns with cautious market sentiment. Shailendra Jhingan, head treasury at ICICI Bank, noted: "Issuers are now preferring to borrow from bank loans, which is probably more attractive after the 125 basis point rate cuts and we have also seen a pick up in wholesale loans recently. Issuances have been tepid in the last two quarters too. Activity in both the overseas and domestic bond market, on the corporate bond side, has been slow."

Sector-Specific Demand Patterns

Despite overall market moderation expectations, certain segments continue to show resilience. Gambhir expects strong demand for bond issuances from non-bank finance companies, which typically represent the largest borrower segment in the bond market. This sector-specific demand may provide some support to overall market activity.

Market Dynamics and Corporate Preferences

The current environment has created a preference shift among corporate issuers. Bank loans have become increasingly attractive following the substantial rate cuts, leading to reduced appetite for market-based borrowing. Corporate bond issuances are expected to moderate as rising bond yields make traditional bank financing more cost-effective for borrowers.

The combination of policy rate reductions and rising market yields has created an unusual dynamic where monetary easing has not translated into increased bond market activity, highlighting the complex relationship between policy rates and market-determined borrowing costs.