Banks might see hit on treasury portfolio due to volatile yields

The yield on the 10-year benchmark bond 7.16% 2023 ended at 7.45% on Friday compared with previous close of 7.56%

Most banks might see their treasury portfolio taking a hit as government bond yields have been volatile in this quarter, which ends on Sunday. According to treasury officials of a few public sector banks, there have been marked-to-market losses and that would get reflected in their books.

The yield on the 10-year benchmark bond 7.16 per cent 2023 ended at 7.45 per cent on Friday compared with the previous close of 7.56 per cent. The yield was at 7.99 per cent on April 2. But at that time, it was the old 10-year benchmark 8.15 per cent 2022. The new 10-year benchmark was launched on May 17 and at that time, the yield was 7.16 per cent.

“This quarter would be better than the same quarter last financial year, but it would be like the previous quarter,” said the head of treasury of a public sector bank. In the previous quarter, most banks had taken a hit on their treasury portfolio.

Banks had bought government bonds on hopes there would be two repo rate cuts in this quarter. The Reserve Bank of India (RBI) had cut the repo rate by 25 basis points in May and this is now 7.25 per cent. Expectations of a further cut in the mid-quarter review were, however, not met as the rupee started weakening significantly against the dollar. The weakening rupee took a toll on bond yields.

The recovery began only in the last couple of days, on the back of a narrowing current account deficit (CAD) in the fourth quarter of the last fiscal. After the CAD data was released, the rupee found support. On Friday, the rupee strengthened after the US Fed downplayed the notion they would bring an imminent end to its bond-buying programme also known as third round of quantitative easing. The strengthening rupee resulted in bond yields falling.

“There will be losses in the treasury portfolio, as many banks had taken position on hopes of a further repo rate cut in June,” said the treasury head of another public sector bank.

The street is now looking forward to the possibilities of a repo rate cut in the first-quarter review of monetary policy on July 30. Then, there are hopes the rupee would strengthen from the current levels due to which yields might fall further.