India’s bond market is flashing warning signs. While the Reserve Bank of India cut the repo rate by 25 bps to 6.25% on February 7, optimism for cheaper corporate credit remains misplaced. Risk-averse investors are fleeing long-term bonds for short-term commercial papers, leaving BBB-rated borrowers — the backbone of India’s job-creating mid-and-small enterprises sector — stranded in a liquidity drought.Data from India Rating and Research reveals a troubling divergence: issuances of BBB-rated bonds, the lowest rung of investment-grade debt, have plummeted, while CPs from the same entities remain robust. This flight to short-term instruments reflects growing caution about corporate India’s medium-term health. Investors, wary of deterioriating asset quality in retail subprime portfolios and economic headwinds, are prioritising liquidity over yield. The result is a dysfunctional credit market where even modest rate cuts fail to trickle down to high-risk borrowers.
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