Indian Non-Banking Financial Companies Seek Alternative Funding Through Floating-Rate Bond Issues

Floating-Rate Bonds Gain Popularity Among Indian Firms

The Indian financial landscape is witnessing a shift towards floating-rate bonds as companies seek to manage borrowing costs and attract investors amidst expectations of rate hikes. The yields on conventional fixed-rate debt have increased, making buyers wary of locking in lower rates. As a result, some Indian firms are turning to floating-rate bonds, which offer a more attractive option for both issuers and investors.

Key Features of Floating-Rate Bonds

Floating-rate bonds have coupons priced at a spread over three-month Treasury bill yields and reset quarterly. This makes them more attractive to issuers and investors when rate hikes are expected. Companies can borrow at a lower initial cost, while investors benefit from returns that rise over time.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

Recent Developments

Four non-banking finance companies, including ICICI Home Finance, Tata Capital, Mahindra & Mahindra Financial Services, and HDB Financial Services, plan to raise approximately Rs. 85.50 billion ($887.74 million) this week through the sale of floating-rate bonds with a three-year maturity. These companies have traditionally relied on fixed-rate bonds for their funding requirements.

Market Trends

The volatile interest-rate environment has led to a rising interest in floating-rate bonds. Several issuers have been struggling to raise targeted amounts through fixed-rate issuances. The bets on the Reserve Bank of India raising interest rates in 2026 have strengthened, with inflation expected to rise due to persistently high oil prices from the Iran war.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Comparison of Fixed-Rate and Floating-Rate Bonds

The spreads on AAA-rated floating-rate debt are currently in the 193-210 bp range over the T-bills, implying a yield of about 7.35%. This is roughly 30-40 bps lower than the comparable fixed-rate bonds.

Investor Perspective

Investors can use the swap market to convert floating returns into fixed ones. From the issuer's perspective, they are "getting good size", referring to a larger quantum of funds, and added that their incremental cost of funds is lower.