New Delhi [India], July 22 (ANI): Borrowing costs in the bond market could increase in the coming months as upside risks to India's 10-year government bond yield continue amid an uncertain macroeconomic environment, according to a report by Bank of Baroda (BoB).

The report said the outlook for India's 10-year government bond yield remains uncertain and will depend on evolving global conditions, including war-related developments, liquidity conditions, inflation and government borrowing.

It noted that the Reserve Bank of India's current rate cycle is likely to remain cautious even if there is no rate hike. As a result, the report expects upside risks to India's 10-year bond yield to continue.

'In that case, coupled with uncertain macro conditions the risk premium for different entities is also likely to be higher and have a bearing on these bond spreads,' the report said.

According to the report, bond spreads across different categories of issuers increased broadly between March 2026 and June 2026, indicating a rise in the premium investors demand over risk-free government securities.

A bond spread is the difference in yield between two different bonds, usually measured in basis points. It is primarily used by investors to measure the relative risk, value, and return potential of one fixed-income asset compared to another.

The spreads on bonds for PSU FIs& Banks (PFBs), NBFCs and Corporates indicate how the risk premium has evolved over time. These spreads are benchmarked to the risk-free GSec. Besides the movement in these yields, business environment at both the macro and micro levels hold the cue for the direction of spreads.

Among different borrowers, Public Sector Financial Institutions and Banks (PFBs) continue to have the lowest spreads, reflecting their status as institutions that are either owned by the government or considered similar to government institutions.

Corporate borrowers have slightly higher spreads than PFBs, although the difference remains relatively narrow and varies across credit ratings. The report said the financial performance of individual companies, along with industry and overall business conditions, plays an important role in determining these spreads.

The report noted that Non-Banking Financial Companies (NBFCs) continue to face the highest borrowing premium in the bond market. It attributed this to higher risk perception associated with the sector and the fact that NBFCs account for 60-70 per cent of bond issuances in the market.

Looking ahead, the report said borrowing costs in the bond market could rise further if India's 10-year bond yield moves higher and macroeconomic uncertainty persists. (ANI)