A widening rift between monetary policy intent and bond market reality is becoming increasingly visible in India’s debt markets. Despite the Reserve Bank of India’s recent repo rate cut, borrowing costs for long-term issuers have moved higher, compelling several public sector entities to step back from planned fundraisings. This divergence is now influencing capital-raising decisions across government-linked institutions.

The latest instance came on Monday when Indian Railway Finance Corporation withdrew a proposed bond issue, becoming the third state-owned borrower in just one week to do so, following similar moves by Power Finance Corporation and the Small Industries Development Bank of India. Together, these withdrawals point to mounting stress along the yield curve rather than issuer-specific concerns.

IRFC had planned to raise up to ₹5,000 crore through 10-year zero-coupon bonds. However, investor appetite failed to materialise at the yield levels the company was targeting. Data from the bid book reviewed by Mint showed that bids worth over ₹4,461 crore were received, but at yields ranging between 6.63% and 7.23%. IRFC was aiming for a yield close to 6.8%, with the upper cut-off near 7.23–7.25%. Faced with limited interest at tighter pricing, the company chose to withdraw the issue.

Merchant bankers cited by Mint said bids consistently came in at higher yields than the issuer was willing to accept. This reluctance reflects a broader unwillingness among PSU borrowers to lock in elevated borrowing costs that could reset pricing benchmarks unfavourably for future issuances.

The IRFC move followed closely on the heels of similar decisions last week. Power Finance Corporation shelved plans to raise up to ₹3,500 crore via 15-year bonds after bids emerged around 7.18%, above its internal expectation of roughly 7.1%. Sidbi, meanwhile, withdrew a proposal to mobilise up to ₹8,000 crore through bonds maturing in November 2029, as bids hovered near 6.9%, compared with its target of about 6.8%.

Market participants emphasise that these pullbacks are symptomatic of systemic pressures rather than credit concerns. Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP, told Mint that a combination of rupee depreciation, lingering global uncertainty, subdued foreign portfolio inflows and a heavy pipeline of long-tenor government borrowing has kept upward pressure on yields.

Srinivasan also framed IRFC’s decision as one of market discipline. Accepting materially higher yields, he noted, could have undermined the credibility of earlier issuances, unsettled existing investors and distorted price discovery - particularly in the still-nascent zero-coupon bond segment.

Zero-coupon or deep-discount bonds are issued at a significant discount to face value and do not carry periodic interest payments. IRFC received government approval in May to issue up to ₹10,000 crore of such bonds. It has so far raised ₹2,982 crore through a late-November tranche of 10-year zero-coupon bonds at a cut-off yield of 6.8%, against an initial plan to raise ₹4,000 crore in that round. The current withdrawal suggests the issuer is unwilling to deviate materially from that pricing benchmark.

The broader significance lies in what this episode reveals about the transmission of monetary policy. Despite the RBI cutting the repo rate by 25 basis points to 5.25% on December 5, benchmark government bond yields have moved in the opposite direction. Since the policy announcement, the yield on the 10-year government bond has risen by about 10 basis points to 6.59%, according to Mint. As government bond yields serve as the reference point for corporate debt pricing, higher sovereign yields have directly pushed up borrowing costs for issuers.

Madan Sabnavis, chief economist at Bank of Baroda, pointed out that the historical spread between the repo rate and the 10-year government bond yield has typically been around 80–100 basis points. That gap has now widened to approximately 134 basis points, highlighting the extent of the current divergence.

Explaining the mechanics, V.R.C. Reddy, head of treasury at Karur Vysya Bank, told Mint that while policy rate cuts tend to influence short-term rates relatively quickly, long-term yields are shaped by liquidity conditions, fiscal supply, inflation risks and investor balance sheet constraints. Unless systemic liquidity improves meaningfully and supply pressures from government borrowing ease, long-term yields may continue to resist policy signals.

For Indian debt markets, the episode reinforces that rate cuts alone are insufficient to ease financial conditions if liquidity and supply-side factors remain tight. Persistent high yields could delay or stagger bond issuance plans, particularly for long-tenor debt. Infrastructure financiers and development finance institutions, which rely heavily on bond markets for long-term funding, face the most immediate impact. Elevated yields can compress spreads, affect project viability and slow credit transmission to end sectors such as power, railways and MSMEs.