PSUs Flock to Debt Market as Quarter-End Funding Needs and Softer Yields Drive Bond Issuances

PSUs Flock to Debt Market : India’s corporate bond market is witnessing a sudden surge in activity, led by public sector undertakings (PSUs) such as Numaligarh Refineries, NABARD, Rashtriya Chemicals and Fertilizers, and Power Finance Corporation (PFC). After two months of subdued activity caused by elevated yields and weak market sentiment, September has brought signs of revival, with PSUs rushing to raise thousands of crores through bond issuances to meet quarter-end funding requirements.

The timing of these issuances is not accidental. With the Reserve Bank of India’s Monetary Policy Committee (MPC) meeting scheduled in October, issuers are looking to capitalize on the softer yield window and strong investor appetite before any potential policy changes impact borrowing costs. Experts note that PSUs tend to bunch issuances at the end of quarters, ensuring liquidity and balancing funding requirements.

Data shows that corporate bond activity has been uneven this financial year. Corporates raised ₹3.42 lakh crore in Q1 FY26 compared to just ₹1.27 lakh crore in Q2 till August, according to Primedatabase. The upcoming PSU issues could mark a rebound in market participation, signaling renewed confidence amid easing inflation expectations and hopes of rate cuts later this year.

PSUs Seize Softer Yields Window

Bond Issues This Week

• Numaligarh Refineries: Raising ₹5,000 crore via a 10-year bond on September 22.
• NABARD (National Bank for Agriculture and Rural Development): Planning to raise around ₹7,500 crore through a three-year bond.
• Rashtriya Chemicals and Fertilizers & Power Finance Corporation (PFC): Preparing to tap markets after a gap.

Though some of these institutions are regular issuers, the decision to issue bonds now reflects both quarter-end requirements and the current yield environment.

Yield Dynamics

The 10-year AAA-rated corporate bond yield is currently trading at 7.25%, compared to 7.15% in July and 7.0% in June, as per Bloomberg data. This slight softening from recent highs is encouraging issuers to lock in funds before the MPC meeting, where policy outcomes could once again shift borrowing costs.

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Investor Appetite Shapes Issuance

Demand Drivers

Investor demand for long-term AAA-rated PSU bonds remains robust due to their relative scarcity compared to the steady supply of government securities. This limited availability, coupled with the high credit quality of PSUs, has made them attractive for investors looking for safe yet higher-yielding instruments.

“Issuers may look to take advantage of this window ahead of the October policy amid rate cut hopes and inflation easing expectations,” said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP.

Investor Mix

• Mutual Funds: Demand may remain muted because of quarter-end redemption pressures.
• Banks, Pension Funds, and EPFOs: These institutions continue to provide steady demand for PSU issuances, keeping the market supported.

Srinivasan further noted that while corporate bond yields are still elevated, first-time or less frequent PSU issuers may benefit from sharper yield corrections compared to regular issuers who face stronger pricing discipline.

Quarter-End Phenomenon and Market Sentiment

The bunching of PSU issuances is largely a quarter-end phenomenon. Market participants confirm that PSUs prefer to shore up liquidity before closing books at the end of each quarter. The proximity to the October MPC meeting adds urgency, as issuers seek to finalize borrowings before any potential policy rate surprises.

“The bunching of PSU issuances we are seeing is largely a quarter-end phenomenon, as many of them shore up resources before closing. The MPC adds a layer of timing urgency, since issuers prefer to lock in demand before any potential policy impact,” said V R C Reddy, Head of Treasury, Karur Vysya Bank.

Outlook for Corporate Bond Market

The near-term outlook for India’s corporate bond market hinges on three key factors:

1. Monetary Policy: Any shift in RBI’s stance on interest rates in October will influence yields and demand.
2. Inflation Trends: Easing inflation strengthens the case for rate cuts, improving borrowing conditions for PSUs and corporates.
3. Investor Sentiment: With strong demand from long-term institutional investors like pension funds and EPFOs, PSUs are well-positioned to raise funds, though mutual fund appetite may remain weak in the short term.

If inflation continues to ease and policy rates stabilize or decline, issuances from both PSUs and private corporates are expected to accelerate in the second half of FY26.

Conclusion

The sudden spurt in PSU bond issuances highlights the delicate balance between elevated yields, quarter-end funding pressures, and market opportunities. By moving quickly, PSUs are ensuring access to liquidity at relatively softer rates before the October policy review.

Investor appetite for PSU bonds remains strong, especially among long-term institutional players like banks and pension funds, which view these instruments as safe havens amid uncertain global conditions. While mutual fund demand may remain subdued, the overall support for high-quality issuances is intact.

Looking ahead, the corporate bond market is likely to see greater participation as inflation eases and hopes of rate cuts gain momentum. For PSUs, this window provides an opportunity to lock in funds efficiently, strengthening their financial position in a volatile interest rate environment.

Ultimately, the revival of activity in September could signal a turning point for the corporate debt market, bridging the gap between muted activity earlier in the year and stronger issuance trends expected in the months to come.

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FAQs of PSUs Flock to Debt Market

1. Why are PSUs issuing bonds aggressively at the end of September?

PSUs often bunch up bond issuances at the end of each quarter to meet liquidity and funding needs before closing books. This quarter-end surge also aligns with softer yields and the upcoming RBI Monetary Policy Committee (MPC) meeting, which could impact borrowing costs.

2. How do tariffs and inflation affect bond yields and issuances?

While tariffs directly impact auto and manufacturing costs, inflation remains the key driver for bond yields. Higher inflation keeps yields elevated, making it expensive for issuers to borrow. As inflation eases, yields soften, creating windows of opportunity for PSUs to issue bonds at more favorable rates.

3. Who is investing in PSU bonds right now?

Banks, pension funds, and the Employees’ Provident Fund Organisation (EPFO) are the primary investors in PSU bonds due to their long-term horizons and appetite for high-quality credit. Mutual funds, however, may remain cautious during quarter-end periods because of redemption pressures.

4. What are current yield levels for PSU bonds?

According to Bloomberg data, 10-year AAA-rated PSU bond yields are around 7.25%, up from 7.15% in July and 7.0% in June. While yields remain elevated, they have softened slightly in September, encouraging PSUs to tap the market.

5. What is the outlook for the Indian corporate bond market in FY26?

The outlook depends on inflation and monetary policy. If inflation continues to ease and RBI moves toward rate cuts, yields are expected to decline, making borrowing cheaper. This would encourage both PSUs and corporates to increase bond issuances, leading to stronger market activity in the second half of FY26.