About the same time last year, Reliance was raising money for two to three months at 6.13-6.15 per cent, much closer to the prevailing treasury bill rate. On Tuesday, Godrej Industries raised money through three-month commercial paper at 7.12 per cent.

State-owned firms, though, seem to be doing remarkably well. Chennai Petroleum raised money for two months at 6.59 per cent on April 16, while Indian Oil at 6.55 per cent.

This clearly underlines how much rates have shot up for corporate entities in India. The size of the issuance matters, but rates have climbed up only recently. On January 11, Reliance Industries had raised the same amount at 6.38 per cent for commercial paper maturing in 70 days. Commercial paper matures within a year. On January 11, the company raised money for two months at only 24 basis points above the prevailing treasury rate.

The steep cost of borrowing by Reliance Industries should be cause for concern for the rest of the Indian corporate sector.And yet if Reliance has to shell out about one percentage point more for short-term money, after some time the bond market could be out of bounds for many lower-rated firms altogether, experts say.

The hardening of commodity prices is already making inputs costly for companies, and now with financing cost also going up, it would be very difficult for companies in the coming days, according to Soumyajit Niyogi, associate director at India Ratings and Research.

In its monetary policy report released on April 5, the Reserve Bank of India (RBI) noted that even as capacity utilisation had improved marginally for Indian companies, their input cost was also rising but final prices were not rising enough.

As such, companies are witnessing a margin squeeze. The rise in financing cost is likely to exacerbate the situation. Mutual funds and banks are major buyers of commercial paper issued by companies. Demand from banks has almost evaporated due to lack of investible surplus at a time when they are struggling to provide enough for their bad debts. Besides, 11 banks are already under the prompt corrective action framework of the Reserve Bank of India (RBI). This severely restricts their ability to lend or invest.

The prospect of a steep rise in bad debts looms after the RBI’s February 12 circular that suggested that banks must put a company through resolution process the moment the account extends its payment deadline of 90 days. In that case, a company will be declared defaulter and banks can put in motion a number of steps that could culminate in the company being referred to the National Company Law Tribunal (NCLT), said Prabal Banerji, group finance director at the Bajaj Group.

“Obviously, borrowers are finding it difficult to raise resources, and when they are managing to raise some, it is at a substantively higher rate. There is going to be no respite from this for India Inc for some years. The only exceptions are MNC and industries like FMCG and pharmaceuticals,” Banerji said.

In the absence of banks, mutual funds have become the largest buyers of short-term paper. In order to provide higher returns to their investors, mutual funds are also asking for higher rates from companies. In most cases, there is no option but to oblige. Non-banking finance companies, which constitute 70 per cent of the corporate debt market, have increased their issuance in the market as most of them have increased their lending, Niyogi said.

The outstanding amount of commercial paper at the end of March 2018 was Rs 3.72 trillion, down from its year-ago period of Rs 3.98 trillion, RBI data showed.

Compounding the problem for corporates is the rising borrowing cost in longer dated securities as well.

The 10-year bond yield closed at 7.68 per cent on Tuesday, up from 7.34 per cent at the beginning of the calendar year. In between, yields had dropped to 7.13 per cent in early April as the government’s first half borrowing came in lower than what the market expected. But yields have started climbing again after minutes showed the RBI’s monetary policy members were unusually hawkish about rates, against the bearish outlook presented during the April policy.

Now that the US 10-year treasury is close to 3 per cent, after about four years, chances of Indian bond yields shooting up further is real. Even if the spread between corporate yields and government bond yields remain intact, the rising yields don’t bear good news for companies at a time when even banks are not ready to give them loans.