Banks set to make treasury gains in Q4 FY25 as bond yields soften

The yield on the 10-year benchmark government bond fell 8 basis points in the previous week - the steepest weekly decline in four months, since November 30, 2024 - to settle at 6.62 per cent

Banks are set to make treasury gains in the fourth quarter of the current financial year (2024-25) as the yield on government bonds has softened so far this quarter, driven by strong inflows into the debt segment, market participants said.

 

The yield on the 10-year benchmark government bond fell 8 basis points (bps) in the previous week — the steepest weekly decline in four months, since November 30, 2024 — to settle at 6.62 per cent.

 

The five-year bond yield fell by 22 bps during the same period, while the 14-year bond yield declined by 11 bps.

 

“The banks will make mark-to-market gains as yields have fallen significantly,” said the treasury head at a private bank. “Treasuries will wait and book profits as yields are expected to fall further by 3-4 bps,” he added.

 

In the third quarter, the benchmark yield was steady, rising by just 1 basis point, whereas in the second quarter, it had softened by 25 basis points.

 

Government securities under the fully accessible route (FAR) received net foreign inflows worth ₹8,560 crore during the week. On Friday, foreign investors net bought ₹644 crore worth of FAR securities.

 

Net foreign inflows into the domestic debt market in March so far have been the highest since August 2024. Foreign investors have net bought ₹8,497 crore worth of domestic securities in March as of Wednesday.

 

“The rising expectation of another rate cut in June has brought in more inflows, and the open market operations (OMO) auctions by the Reserve Bank of India (RBI) have helped banks make some gains as they pulled out bonds from their held-to-maturity (HTM) portfolio,” said the treasury head at a state-owned bank.

 

The RBI has been deploying liquidity measures to address tight liquidity conditions in the banking system. Net liquidity in the banking system was in a deficit of ₹2.32 trillion as of Thursday, according to the latest RBI data.

 

Market participants said state-owned banks were the major participants in the OMO auctions.

 

So far, the RBI has conducted OMO purchase auctions worth ₹2 trillion in 2025. The central bank will conduct an additional ₹50,000 crore OMO purchase auction on Wednesday.

 

After the new investment norms came into effect on April 1, 2024, banks must categorise bonds as HTM on a permanent basis, except for 5 per cent of the portfolio, which can be withdrawn throughout the year. Any deviation from this rule requires approval from both the bank's board and the RBI. However, these bonds can be used for OMO auctions.