Iran Conflict Sparks Rise in Domestic Lending as Offshore Debt Costs Increase

Offshore Bond Markets for Indian Corporates Disrupted by West Asia War

The ongoing West Asia war is causing significant disruptions in offshore bond markets for Indian corporates, leading to increased borrowing costs and forcing issuers to explore domestic funding options for refinancing needs this year. A combination of rising crude prices, elevated global yields, widening credit spreads, and weak investor sentiment has effectively shut primary offshore markets in the near term, according to bankers and market participants.

This comes at a time when Indian companies face an estimated $13–15 billion of offshore bond maturities this year, creating a substantial refinancing pipeline. The weak outlook for offshore bond offerings follows a 43% decline in funds raised from offshore bond issuances in 2025, with $5.5 billion raised compared to $9.6 billion a year earlier, as per data from LSEG.

The shift towards domestic funding is being driven primarily by a sharp increase in the all-in cost of dollar borrowing. According to Akshay Kumar, head of global markets, India at BNP Paribas, issuers are recalibrating their borrowing strategies, with some opting to postpone issuances and shift to onshore markets for borrowing.

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Indrani De, head of global investment research at FTSE Russell, noted that the macro backdrop has worsened in recent weeks, with inflation risks resurfacing due to higher energy prices. This has led markets to dial back expectations of US Federal Reserve rate cuts in 2026, with the conflict taking two rate cuts off the table this year, as per Fed Funds futures data as of end March 2026.

The war is directly impacting the overall cost and viability of dollar borrowing for Indian corporates, with higher inflation and supply-side pressures pushing yields higher across the curve. Kumar noted that the all-in cost for floating rate loans has already increased by 50–70 basis points, while bond yields are being driven higher by rising risk-free rates and widening credit spreads.

At the same time, investor appetite for emerging market credit has weakened, with foreign portfolio investors pulling record amounts from Indian equity and debt markets in March, signaling weak risk appetite. Sameer Gupta, managing director and head of DCM India and Southeast Asia at Deutsche Bank, said that while appetite for Indian credit remains structurally strong, risk sentiment has deteriorated sharply.

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Domestic markets, by contrast, continue to offer ample liquidity and relatively lower borrowing costs, making them an attractive alternative. Gupta noted that Indian borrowers have access to adequate domestic liquidity and typically evaluate offshore borrowing based on cost benefits and diversification needs. However, the current landed cost of offshore borrowing is significantly higher than domestic funding, reducing the incentive to tap global markets.

Currency volatility and rising hedging costs are further complicating the decision, with the rupee being among the worst-performing Asian currencies over the past year. Kumar added that both hedging costs and absolute bond yields have risen, making offshore borrowing less attractive compared to domestic funding for many issuers.