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Informist, Saturday, May 23, 2026

 

By Vaishali Tyagi

 

NEW DELHI – As fears that the Reserve Bank of India would raise interest rates in the second half of this financial year turn into expectations that an off-cycle rate hike may materialise as early as June, corporate bond issuers have quietly, but in a big way, shifted to floating rate bonds. These bonds allow investors to hedge against the risk of locking into low rates when interest rates are likely to go up and they also allow borrowers to pay more only when the benchmark rates actually go up.

 

Corporate bond issuers and investors sparred over rates in the last quarter of the 2025-26 (Apr-Mar) which resulted in five issues getting scrapped as borrowers sought to pay only marginally higher rates but investors sought significantly higher coupons. The total amount of borrowing that was scrapped by corporate borrowers in that quarter was INR 300 billion, almost 13% of the eventual total issuance of INR 2.43 trillion that quarter.

 

The resolution took time, but it was quick when it happened. As much as 34% of the INR 283 billion corporate borrowers raised from the bond market in just the last one week was in the form of floating rate bonds. These issues are linked to the 91-day Treasury bill yield and the average mark up for a AAA-rated company was 208 basis points. The total cost for these AAA-rated borrowers for a floating rate bond was 7.53%, significantly lower than the 7.6%-7.7% investors sought as far back as March when the expectations of an interest rate hike were much lower. So far, only AAA-rated companies have issued floating rate bonds in the new financial year.

 

Apart from the INR 97 billion that companies have tapped in the last one week through five floating rate bond issues, another INR 100 billion of such bonds are in the pipeline over the next few days. This will take the total of the amount raised via floaters – as they are called – to over 20% of the total issuance so far this year. If proof was ever needed that floating rate bonds work, this is it. Only one issue was scrapped in FY27 so far and that was on May 15 - a reissue by the National Bank of Agriculture and Rural Development. The corporate bond market seems to be back at work!

 

Tata Capital raised INR 29.5 billion through bonds maturing on Feb. 21, 2029, while Mahindra & Mahindra Financial Services raised INR 22 billion through bonds maturing on May 18, 2029. HDB Financial Services Ltd. raised INR 3 billion through three-year floating rate bonds.

 

ICICI Home Finance Co. Ltd. tapped the market to raise up to INR 6.50 billion through the issuance of three-year bonds maturing on May 21, 2029 and Mahindra Rural Housing Finance Ltd. invited bids to raise INR 4 billion through the issuance of floating rate bonds maturing on May 22, 2029. However, dealers had not confirmed the allotted amounts of these deals at the time of writing.

 

Cholamandalam Investment and Finance Co. Ltd. plans to raise INR 50 billion Monday through floating-rate bonds maturing Feb 27, 2029, while Muthoot Finance Ltd. aims to raise up to INR 50 billion via floating-rate bonds due Jul 26, 2029. PNB Housing Finance Ltd. is expected to announce its issue soon.

 

FLOATERS SOLVE DILEMMA

Market participants expect issuances of floating rate bonds to rise further in the coming days depending on whether overnight interest swap rates go higher. "FRB (floating rate bonds) issuances will rise further if OIS rates climb," a senior fund manager at Tata Mutual Fund said. "If OIS rates comes down, then you will see lesser FRB issuances." Some market participants expect floating rate bond issuances to rise above 25% of total issuances in the June quarter, while others see the share remaining below or near 25%, dealers said.

 

"There are people pricing in a rate hike, for example, all the markets participants are expecting 2-3 rate hikes for this year...therefore OIS is higher, your short-term money market rates are higher so there is an inherent risk of higher interest rate if the energy price persists, so people are expecting that we may see rates going higher," the senior fund manager said. "So people are expecting that we may see rates going higher from here...and in that scenario, the best thing to do is raise a floating rate bond." 

 

Overnight indexed swap rates have climbed steadily in recent weeks with the one-month OIS rate nearly pricing in a repo rate hike of 25 basis points in the next month itself. The one-year overnight indexed swap rate was roughly pricing in around 145 basis points of rate hikes over the next 12 months, dealers said. Expectations of higher inflation in the coming months rose after the wholesale price index inflation print for April came in sharply higher than market estimates. WPI inflation in India rose to a 42-month high of 8.30% in April on the back of a significant jump in fuel and power inflation stemming from the war in West Asia.

 

The one-year OIS, the barometer of rate expectations one year forward, closed above 6% for the first time in 2026 on Mar. 27. It closed above this mark again only once in March and thrice in April. In May, it has closed above this level 11 times and notably has been above this mark every day since May 12. It has also risen sharply above 6%, the peak being 6.37% on Apr. 2 which was almost tested again Thursday.

 

Most floating rate bonds are linked to the 91-day Treasury bill plus a spread depending on the issuer's credit profile and rating, market participants said. "T-bill plus spread is the normal norm...now that spread is dependent on various factors...if a PSU (public sector undertaking) is issuing a bond, let's say NTPC (NTPC Ltd.) or PGCIL (Power Grid Corp. of India), probably the spread will be lower. But if it's an NBFC paper, the spread will be higher," a fund manager at The Wealth Company said.

 

Spreads on floating-rate bond issues are currently higher than last year as benchmark rates itself are lower, but the spreads depend on the company and its rating, a fund manager at a mutual fund house said. "Issuers will not be very happy to do it (give higher spread)...but given that the (benchmark) rates themselves are so low, investors will want a higher spread," the fund manager said. "Over a period of time, as more interest comes into the FRB structure, I expect those spreads to also reduce." The yield on the latest three-month treasury bill issued on May 14 was 5.34%, down 50 basis points from 5.84% a year ago.

 

From issuers' perspective, floating rate bonds help avoid locking in to high fixed coupons when the rate cycle is uncertain. "You see the point is very simple," a dealer at a brokerage firm said. "If they want money, either they lock in very higher yields or they can postpone locking higher yields when the yields actually go up." 

"If I (as investor) am borrowing at, let's say, 220 basis points over T-bill, if the yields go up then only my rates get adjusted (upwards). Otherwise, the chances of rate getting revised up is pretty minimal. Anyway, if issuer(s) go for a fixed-rate bond, that rate will get fixed (today) itself because people won't be borrowing at this level, they will demand higher premium for the risk they are taking," the dealer said. "Instead of locking in (to) higher yields, if they (issuers) are getting good demand at levels which will materialise only if the rate hike actually happens, it makes more sense operationally for them," the dealer added. 

Market participants said the typical tenor for floating rate bonds is 36 months to 42 months, as issuers and investors avoid locking into these structures for longer periods due to uncertainty over the future movement of interest rates. If yields fall sharply, investors in floating rate bonds can face significant opportunity losses, which makes longer tenors unviable from an investor standpoint. "If the yields go down south drastically, you end up losing a lot of money in floating rate bonds," a senior fund manager at a domestic mutual fund said. "So from an investor perspective also, locking in a much higher tenure doesn't make much sense."

While floaters offer protection in a rising rate regime, they come with their own risks. Liquidity in the secondary market is typically poor for such bonds as compared to plain vanilla bonds. "These bonds are not very liquid, because they are very cycle dependent...today market is seeing a rate hike cycle, so issuing a bond now. If in 3 months' time the cycle changes completely, these bonds become redundant because then no one will want to buy these bonds," the senior fund manager at Tata Mutual Fund said.

He explained that if rate hikes do not materialise for six months, investors earn lower returns as the coupon stays linked to a lower T-bill rate. "In that scenario many people don't want to directly take exposure into a floating rate bond unless they run floater funds," the senior fund manager said. "Hence the liquidity is normally not very good with these bonds. Typically, when they are issued there is some liquidity for some time. But if I look at a period of six months since issue, the liquidity normally dries up as compared to a normal bond," the senior fund manager said.

Mutual funds are the primary buyers of floating rate bonds, with some corporate treasuries also participating when they do not want to lock in a fixed spread, dealers said. Participation from banks and insurance companies is limited. "I have not seen much participation of insurance and banks," the senior fund manager said.   End

 

With inputs from J. Navya Sruthi

Edited by Vandana Hingorani

 

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