PSU banks eye infra bond issuances, await softer yields

This underscores lenders’ funding pressures: with growth in deposits lagging credit, banks are seeking long-term, regulation-efficient funding even as elevated corporate bond yields have made such issuances costly for now. Bankers say the timing hinges on expectations of further liquidity support from the central bank to bring rates down.

Bankers and market participants said lenders are sounding out investors on their plans, but will move ahead only if pricing turns favourable. “All these banks are looking at infrastructure bonds and having discussions with investors and merchant bankers. Looks like they would probably look at the first week of March, as they are trying to get good rates,” said a senior treasury official at a public sector bank.

Rates on banks’ certificate of deposits (CDs) have slightly eased in recent days but longer-tenor corporate bond yields remain elevated, making infra bond issuances expensive at the current levels.

The yield on the 10-year benchmark corporate bond issued by National Bank for Agriculture and Rural Development is currently at 7.45%, up 6-8 basis points since the Reserve Bank of India’s recent policy announcement that had disappointed the bond markets due to lack of fresh liquidity measures.

The bond market now expects RBI to not conduct variable rate reverse repo auctions and instead continue with variable rate repo auctions and open market operations, which would keep liquidity conditions comfortable.

“We are expecting there might be some liquidity measures which will be announced in coming weeks. RBI said that they will be preemptive in giving liquidity so they will just not let the rates go high and the tightness to persist. I think the safest way for the RBI is to not do VRRR,” another treasury official said. That expectation is key for banks considering infrastructure bond issuances, as a softer liquidity backdrop could help improve pricing.

Funding pressures build

Infrastructure bonds would provide banks long-term, stable funding compared to short-term CDs. While rates on one-year CDs have fallen by 15 bps to around 6.85%, they are still on the higher side, traders said.

Banks and financial institutions raise funds through infrastructure bonds to finance long-term, large projects. These bonds have a minimum maturity of seven years and are eligible for some regulatory exemptions, such as mandatory requirements of statutory liquidity ratio and cash reserve ratio. Affordable housing loans also qualify for lending against infrastructure bonds.

“Banks have their approvals in place. They will tap the market only if rates come off. CD rates are quite elevated, so you can’t have bond rates inverted,” said the second treasury official. “There is a lot of demand from retirement funds and provident funds. So clearly, it’s a waiting game.”

Emails sent to Canara Bank, Bank of Baroda, Bank of Maharashtra and Bank of India remained unanswered till press time.

So far in the current fiscal year, only two banks have tapped infrastructure bonds to raise a total of ₹15,000 crore as against ₹94,488 crore raised by 11 lenders a year ago, according to ratings firm Icra Ltd.

Liquidity mismatch

As on Thursday, surplus liquidity in the banking system rose to over ₹3 trillion. At the system level, there appears to be a surplus, but liquidity conditions remain tight due to uneven distribution.

According to a report by CareEdge Ratings, banks’ credit and deposit ratio touched an all-time high of 82.2% for the second consecutive fortnight. In the fortnight ended January 15, 2026, both deposits and credit fell sequentially, with deposits declining faster than credit, widening the gap to 250 bps. Credit deposit ratio is a measure of the headroom available for banks to grow their advances, considering the level of deposits in the system. A higher CD ratio implies lesser headroom.

This fall in deposit growth and reliance on other sources has also lifted banks’ cost of funds, in turn impacting their profitability. With growth in credit outpacing deposits, the banking system is struggling to increase the share of low-cost liabilities, making them turn to wholesale sources, experts said.

While banks are await lower yields to issue infra bonds, investors are looking at seasonal inch-up of yields in March to invest in such papers.

“Infrastructure bond issuances have been tepid in FY26 because investors have adopted a wait-and-watch approach to invest in a long-term bond amid the rate cut cycle and bond yields have been much lower than last year,” Anil Gupta, senior vice-president and co-group head financial sector ratings at Icra said. “However, the recent rise in bond yields amid increasing bond issuances by state governments can lead to higher yields on corporate bonds, including infrastructure bonds, which may improve investor appetite for these long-term investments.”