Rising Borrowing Costs Threaten Small and Mid-Sized Firms in India

Indian small and mid-sized firms are facing increasing risks as borrowing costs rise sharply, impacting their financial health. According to a report by Bloomberg, the cost of borrowing for Indian companies is escalating at the fastest rate in over two years, a trend that could adversely affect businesses already struggling with weak demand.

The stock market is currently in a position of cautious optimism, with Indian stocks aiming to extend their winning streak to six consecutive sessions, marking the longest such run in over two months. Nifty futures indicate a positive start, with the stock benchmark closing above the significant 25,000 mark on March 5, 2025. However, below-average trading volumes signal a lack of investor confidence, indicating that while the bulls are currently in control, they require a strong catalyst to attract more participants.

Impact of Rising Bond Yields

The ongoing rise in bond yields presents a significant challenge for the equity market. Traditionally, when there is a divergence between stock and bond performance, investors are advised to trust the bond market. As equities have enjoyed a fifth consecutive day of gains, the increasing cost of borrowing is raising alarms for many small and mid-sized enterprises. Analysts warn that if higher yields continue to squeeze profit margins, investors may need to reconsider the high price-to-earnings ratios they are currently willing to accept.

The financial sector is also feeling the strain from the higher rate environment. Analysts have reduced their earnings estimates for members of the Nifty Bank Index by 6% since April 2025, reflecting apprehensions about slowing credit growth and diminishing net interest margins. As noted by the Chief Investment Officer at Piper Serica Advisors, banks could soon become a major drag on overall Nifty earnings, especially until they can provide clearer guidance on their cost-to-income ratios.

Regulatory Risks for High-Growth Sectors

In addition to rising borrowing costs, regulatory pressures are creating further risks for high-growth sectors in India. A proposed bill aimed at banning online betting apps has led to a dramatic 13% drop in shares of Nazara Technologies, putting pressure on prominent players such as Dream11 and Mobile Premier League. With approximately 200 million users of fantasy sports apps in India—equivalent to the number of equity trading accounts—the potential impact of this regulation is significant.

Last year’s imposition of a 28% GST levy on online gaming had already unsettled investors, and this latest regulatory move could prompt additional sell-offs in related stocks in the coming days. The sentiment surrounding these high-growth sectors remains volatile as investors assess the long-term implications of such regulations.

Despite these challenges, there may be opportunities within the information technology sector. Analysts point out that the valuation premium for IT stocks compared to the benchmark NSE Nifty 50 Index has reached a five-year low, nearing levels that have historically signaled a buying opportunity. While there are concerns about revenue growth, this de-rating could offer a healthier entry point for investors compared with other sectors that are currently facing inflated multiples.

To stay updated on market developments, readers can follow Bloomberg India for daily insights and analyses. The current landscape presents both challenges and opportunities, reminding investors of the need to remain vigilant and adaptable in a rapidly changing environment.