Banks are set to post substantial gains in their treasury portfolios in the quarter ended September, due to a sharp fall in bond yields after the Reserve Bank of India (RBI) went for a surprise rate cut of 50 basis points (100 bps is one percentage point) on Tuesday.
The yield on the 10-year benchmark bond has dropped by a sharp 32 bps during the quarter, compared with a rise of 12 bps during the financial year's first quarter, ended June.
RBI had on Tuesday, in its bi-monthly monetary policy review, reduced the repo rate (at which banks borrow from the central bank) by 50 bps to 6.75 per cent. It was cut in the first quarter by 25 bps on June 2, to 7.25 per cent.
Senior treasury executive with Bank of India (BoI) said the sharp drop in yields at the end of the quarter would be good for the bottom line, as the treasury can book gains from sale of investments plus part reversal of mark to market (revaluing assets at current prices) provisions. It is indeed a support at a time when the balance sheet is under strain due to high credit costs and low interest income.
The other factor contributing to the fall in bond yields was enhancement of the investment limit for foreign portfolio investors (FPIs). RBI said on Tuesday that the limits for FPI investment in central government securities would be increased in phases to five per cent of the outstanding stock by March 2018. “In aggregate terms, this is expected to open room for additional investment of Rs 1.2 lakh crore in the limit for central government securities by March 2018, over and above the existing limit of Rs 1.54 lakh crore for all government securities,” said the central bank.
“This quarter was better than the (earlier) quarter in terms of treasury gains. Banks might have made on an average treasury gains of Rs 50-100 crore. The gains continue even in the next quarter because there will be more demand for bonds after the enhancement in FPI limits,” said the head of treasury of a large public sector bank.
In the first quarter, yields came under renewed pressure during the first half of May and June. The global bond market selloff, elevated size of the government market borrowing programme and concerns over forecasts of a sub-normal monsoon led to a vertical shift in the yield curve in June over March.
