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Banks are resorting to profit booking in bonds ahead of the end of the financial year 2014-15 due to which bond yields continue to remain elevated even after two rate cuts by the Reserve Bank of India (RBI) in the current quarter. It is expected that even fourth quarter profits of banks will be driven by treasury gains.
The rate cut cycle by RBI began in 2015 and so far the repo rate or the rate at which banks borrow funds from RBI has been cut by 50 bps in two tranches --January and March by 25 bps each time. The last rate cut happened earlier this month and each time after the rate cut the bond market had rallied.
Since the start of the fourth quarter beginning January 1, 2015 the yield on the 10-year benchmark bond has dropped by 6 bps to 7.79 per cent and on February 2, 2015 the yield had even dropped to 7.65 per cent.
“Traders maintain very less positions in March and whatever profits they are able to make, they are making. The bond market is now awaiting the outcome of the two-day US Fed's meeting. If the outlook is hawkish then chances are there for yields going up from current levels,” said Debendra Kumar Dash, associate vice president (treasury), Development Credit Bank.
The Federal Open Market Committee (FOMC) will end its two-day policy meeting Wednesday night, and many experts believe that (FOMC) may drop the word "patient" from its formal statement on the timing of its first interest rate increase since 2006.
“The US Fed may remove the word patient and the market is already expecting this. Treasury gains will drive profits for most of the banks because in February the yields had fallen significantly. Most of the banks would have taken advantage of that which in turn may have brought treasury gains for banks,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.
The credit growth of the banking system had remained muted during the current fiscal but treasury gains had helped profits for banks even in past quarters. For the fortnight ended March 6 credit growth of the banking system grew by 10 per cent year-on-year.
“Banks will be looking to increase their loan book and increase their earnings, hence treasury gains. Given the way the consumption story is playing out, fee based income is more or less expected to be flat. Fee based income is not rising rapidly,” said Ramesh Rachuri, vice president – head of fixed income at Peerless Funds Management Company.
