The decision by State Bank of India, the country's top lender, to accept slightly higher-than-expected yields at its Tier-II bond sale on Wednesday is likely to push up the cost of borrowing for other lenders, bankers said.

SBI raised 100 billion rupees ($1.20 billion) through 15-year Tier-II bonds with a 10-year call option at an annual coupon of 7.81%, compared with market expectations of between 7.72% and 7.78%.

"The coupon was slightly higher than expectations. But looking at the current scenario, we do not expect yields to see any material downside in the near term," said Ajay Manglunia, managing director and head of the investment grade group at JM Financial.

Canara Bank, Bank of India and IDFC First Bank are among the lenders looking to issue Tier-II bonds in the coming weeks on expectations that interest rates will remain elevated in the near term, merchant bankers said.

None of the banks replied to a Reuters email seeking comment.

SBI got bids worth 159.07 billion rupees, against its base size of 40 billion rupees. It had received bids worth 83.05 billion rupees for a cut-off of up to 7.74%.

"Since we have the Federal Reserve policy later today, the bank must not be wanting to come again to complete its planned sale and hence, took the complete amount, even if it had to pay slightly higher," one of the bankers said.

Investors say that the rise in corporate debt yields is due to the relatively narrower spread with government bond yields and an oversupply of overall debt.

Indian states have raised a larger-than-scheduled quantum of funds via debt and the market expects further supply from the central bank's announced central government debt sale.

Indian states sold 10-year bonds in the 7.71%-7.77% band, with the annualised yield still working out to be more than for SBI's bond.

"There is demand for corporate bonds," said Aneesh Srivastava, executive director and chief investment officer at Star Health Insurance.

"But yields are still not attractive enough to go for these papers in a big way." ($1 = 83.3072 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Savio D'Souza)