India Inc.’s Capital Markets Shift: Why Companies Are Choosing Bonds Over Loans

India Inc. is rewriting its financial playbook. For decades, bank loans were the go-to source of corporate funding, but that is no longer the case. A silent revolution is underway as companies increasingly turn to capital markets and corporate bonds to raise money.

This isn’t just a fleeting reaction to lower interest rates or attractive yields. It’s a deeper, more structural shift, driven by evolving market maturity, regulatory tailwinds and a growing appetite for financial agility. As Indian firms chase faster growth with sharper capital efficiency, the bond market is emerging as the new frontier.

In this blog, we examine the forces driving this transition and its implications for India’s corporate future.

The Shift: CapEx Without Carry

April 2025 marked a turning point. Indian corporates issued ₹987 billion in rupee-denominated bonds, the highest April issuance on record, while offshore dollar bond issuances dropped to zero for the first time since May 2020. This trend signals a shift from “CapEx with Carry” (i.e., FX-hedged foreign borrowings) to “CapEx without Carry”, where companies are increasingly raising capital domestically, thereby avoiding the embedded costs and risks associated with foreign exchange volatility.

The RBI’s rate cuts, totalling 100 basis points in 2025, have brought down corporate rupee bond yields by 30–40 basis points in a matter of weeks. Coupled with a liquidity injection of ₹6.2 trillion and plans for an additional ₹1.25 trillion in government bond purchases, the central bank has effectively engineered a bond market rally. For top-tier companies, this has made the domestic market not just competitive but preferable.

Data Speaks: Capital Markets Surge as Lending Slows

According to the Reserve Bank of India’s (RBI) June 2025 Financial Stability Report (FSR), resource mobilisation via capital markets rose 32.9% in FY25, reaching ₹15.7 lakh crore. Debt instruments dominated this surge, accounting for 63.5% of total capital raised. Within debt, private placements represented 99.2% of issuances, signalling growing institutional confidence and deepening market maturity.

Meanwhile, traditional bank lending faltered. Lending to the industrial sector grew by just 6.9% in FY25, while leading banks such as HDFC and ICICI reported sharp declines in corporate loan growth. HDFC Bank’s corporate loan growth, for instance, fell from 18.8% YoY in Q1 FY24 to a mere 1.7% in Q1 FY25. Union Bank and Yes Bank echoed similar trends.

This pivot is not just about cost. Top-rated (AAA) firms tapped the bond market at rates of 6.85–7.18%, while even AA-rated entities managed rates of 8.28–9.36%. Compare this with the average bank lending rate of 9.23% and the economics becomes self-evident.

Strategic Repricing of Risk: What it Means for India Inc.

For companies with large dollar earnings—55% of earnings before interest, taxes, depreciation and amortisation (EBITDA) on average—shifting to rupee-denominated funding doesn’t eliminate currency risk, it merely migrates it. The treasury desk may breathe easier, but the income statement remains exposed. Still, in an environment of global uncertainty and sticky offshore spreads, thanks to US trade measures and elevated credit risk, rupee funding remains the pragmatic choice.

The bond market also offers faster transmission of monetary policy. Unlike loans linked to the MCLR, which adjust with a lag, corporate bond yields react almost instantly to the RBI’s actions. This agility is attracting blue-chip borrowers who now see limited upside in negotiating term loans.

The trend also suggests a slow “de-globalisation” of corporate finance. JPMorgan’s inclusion of India in its GBI-EM index (effective June 28) is expected to deepen local debt markets further, prompting global funds to increase rupee sovereign holdings. This creates a reinforcing loop: more foreign capital in sovereign debt → more domestic liquidity for corporates → stronger capital markets.

Winners, Losers & the Middle Tier

The bond market’s current surge has largely benefited highly rated, cash-rich corporates. AAA-rated firms accounted for over 67% of issuances, per the FSR. These companies can navigate the bond market with ease, benefitting from favourable pricing and strong investor appetite.

But what about mid-tier firms? While some AA-rated companies have entered the fray, the cost differential versus bank loans remains narrow. Moreover, bond issuance requires a well-rated balance sheet, transparency, and often, a robust investor relations infrastructure. For this segment, capital markets are still aspirational rather than accessible.

For banks, this shift poses a structural challenge. Corporate lending has always offered thin margins, particularly with top-tier clients. Now, even that silver is eroding. As a result, banks are rethinking their engagement models, shifting toward fee-based income, digital transaction banking and holistic client assessments.

Future Risks: Liquidity, Inflation and Policy Inflection Points

While the current bond market environment is favourable, risks remain. A spike in inflation or political risk could quickly raise rupee yields, compressing spreads and reducing the attractiveness of capital markets. Moreover, over-reliance on bond markets could leave some corporates vulnerable if liquidity conditions tighten or investor sentiment turns.

A related concern is hedging or the lack thereof. If corporates reduce FX borrowings but retain unhedged revenue exposure, balance sheets could suffer in the event of sharp currency depreciation. The RBI flagged this risk in its latest FSR.

Strategic Implications for Banks, Policymakers, and Investors

For Banks:

• Redefine value proposition: Move beyond lending to offer integrated solutions including payments, treasury, and trade finance.

• Strengthen fee-based income streams: Transaction banking, cash management, and advisory services must be scaled.

• Invest in credit analytics: As mid-tier clients seek to tap the bond market, banks can play a role in underwriting and market-making.

For Policymakers and the RBI:

• Deepen the bond market: Accelerate development of credit-enhancement mechanisms to bring more AA-rated and SME players into the fold.

• Create templates for rupee project bonds: Channel long-duration domestic savings from insurance and pensions into infrastructure.

• Digitise bond issuance: Leverage ONDC-style platforms to democratise access and reduce distribution costs.

For Investors:

• More opportunities to invest: As more companies raise funds via corporate bonds or go public, the range of investment options widens—from debt instruments with predictable yields to equity in emerging sectors.

• Improved market transparency: Public issuance norms and credit ratings bring more visibility into a company’s health than private bank loans, helping investors make informed decisions.

• Stronger trading ecosystem: The shift toward capital markets means higher liquidity and deeper participation, potentially driving more active secondary markets across both bonds and equities.

• IPO pipeline boost: As companies move away from traditional bank funding, many will tap into the equity markets to raise growth capital, fuelling a richer IPO calendar for traders and investors.

• Momentum for fixed income and Exchange Traded Funds (ETFs): With the bond market deepening, investors may find greater access and liquidity through mutual funds and exchange-traded products focused on corporate debt.

Conclusion: A New Era of Corporate Finance

India Inc.’s pivot from bank loans to capital markets marks more than just a shift in funding preferences—it signals a maturing financial ecosystem where agility, cost-efficiency, and transparency matter more than ever.

For banks, this is a wake-up call to evolve beyond traditional lending. For policymakers, it’s a nudge to widen and democratise access to debt capital. And for investors—both institutional and retail—it’s a door to a broader range of investment options, better price discovery, and participation in India’s next growth cycle.

As capital markets deepen and regulatory support builds, expect more bond issuances, diversified IPOs, and new instruments to hit the market. In short, more ways for India Inc. to grow—and more ways for investors to grow with it.