Banks to book treasury gains in Q1FY26 on yield fall, OMO support

Bond yield drop and ₹2.5 trillion RBI OMOs to lift treasury income in Q1FY26 but weak credit growth may weigh on net profits, especially for PSU banks

Banks are expected to post healthy treasury gains for the first quarter of the current financial year, said market participants. According to them, this would be aided by a decline in government bond yields and strong participation in the Reserve Bank of India's (RBI’s) open market operations (OMO).

 

The benchmark 10-year government bond yield fell by about 20 basis points (bps) during the quarter, from around 6.58 per cent to 6.38 per cent. The sharpest drop in yields occurred ahead of the RBI's policy actions in June. At one point, the yield had even touched 6.24 per cent, indicating substantial mark-to-market gains for bond portfolios, said market participants.

 

However, there was some reversal in yield in June after the RBI’s latest monetary policy decision. The domestic rate-setting panel cut the policy rate by 50 bps and shifted its stance to neutral, leading to a partial rebound in yields. The new benchmark bond yield bounced back by 12–13 bps from its lows in the aftermath of the policy.

 

Despite this uptick, the overall yield movement still translated into quarterly gains.

 

In addition to the decline in yields, the RBI conducted ₹2.5 trillion worth of OMOs during the quarter.

 

This largescale bond purchase programme provided additional support to bond prices and trading volumes, boosting treasury income for banks.

 

“There are good gains on account of trading gains from the softening of yields during the quarter and the ₹2.5-trillion OMO auction participation. Both put together, there is a good treasury gain expected for the June quarter,” said VRC Reddy, head of treasury at Karur Vysya Bank. 

 

Market participants said that these factors are expected to aid non-interest income for banks, particularly public sector lenders that hold large portfolios of government securities. However, these are unlikely to lift net profits, which may decline sequentially due to a slowdown in overall credit growth.

 

“Banks are set to gain on treasury but it will not be sufficient to improve net profits as they are expected to decline quarter-on-quarter (Q-o-Q). This is owing to a slowdown in overall credit growth,” said a senior banking official with a public sector bank.

 

Credit growth is expected to remain soft due to lower demand for unsecured loans and mortgages, alongside cautious lending to non-banking financial companies (NBFCs), even though the RBI has eased some norms.

 

According to RBI data, bank credit growth was 9.7 per cent as of June 13, 2025, significantly down from 19.78 per cent a year earlier.

 

For FY25, loan growth stood at 11 per cent and deposit growth at 10.3 per cent, down from 20.2 per cent and 13.5 per cent, respectively, in FY24.