India’s Short-Term Borrowing Costs to Stay High

India Ratings and Research (Ind-Ra) projects that India’s short-term borrowing costs will remain elevated, with lower-rated non-banking financial companies (NBFCs) facing wider credit spreads.

This firmness stems from increased corporate funding needs, driven by rising commodity prices and softer operating margins. These conditions are expected to boost both bank lending and money-market activity.

Pressures on Interest Rates

Ind-Ra notes that while the interest rate environment is currently balanced, risks are increasingly skewed upwards. Resilient economic growth, strong credit demand, and emerging inflationary pressures contribute significantly to this outlook.

Geopolitical uncertainties and a firmer global rate environment also play a role in this upward pressure. Potential monetary policy tightening and stronger credit demand in the second half of FY27 could further intensify these trends.

Additionally, higher state development loan issuances are an extra factor expected to exert upward pressure on interest rates. These combined elements create a complex financial landscape for borrowers.

System Liquidity and Funding Challenges

System liquidity is anticipated to moderate starting from the third quarter of FY27, influenced by several key factors. This shift will impact various segments of the economy.

Contributing elements include festive-season currency leakage, a higher current account deficit, and softer government spending. Subdued capital inflows also play a role in this expected moderation.

While larger corporates are generally well-positioned to navigate this environment, smaller businesses and financial institutions may struggle. They could face challenges in securing adequate growth capital.

For NBFCs, the higher-rate environment is making risk capital more selective and expensive. Investors are increasingly favoring companies that demonstrate strong liability franchises, resilient cash flows, and disciplined balance sheets.

Conversely, lower-rated and highly leveraged borrowers will likely encounter higher funding costs and longer fundraising cycles. This differentiation highlights a tightening credit market.

Credit Dynamics and Banking Outlook

Ind-Ra expects credit and term premia to remain elevated, driven by ongoing inflation risks and geopolitical uncertainty. External-sector concerns, healthy credit demand, and persistent pressure on banks’ funding costs also contribute to this.

Despite these challenges, higher rates could support banks’ profitability through repricing mechanisms. Banks are expected to pass on increased funding costs resulting from intensified deposit mobilization challenges.

The agency has revised its FY27 banking system credit growth forecast upwards to 15 percent, from an earlier projection of 13 percent. This new forecast surpasses its 13.6 percent deposit growth forecast for the same period.

Rising working-capital requirements are set to sustain demand for short-term financing. Companies are increasingly relying on bank credit lines and commercial paper to meet these needs.

Spreads for NBFCs rated AA− and above are projected to stabilize or rise moderately. However, those for issuers rated below A could see further widening, indicating differentiated market access and higher risk premiums.