Treasury income under pressure for banks in Q3 as yields stay elevated

RBI repo rate cuts fail to ease yields across tenors

Banks are unlikely to book any treasury gains during the third quarter (October–December) of the current financial year (2025–26/FY26), as government bond yields across tenors remained elevated despite the Reserve Bank of India’s (RBI’s) policy repo rate cut and liquidity infusion. 

While the yield on the benchmark 10-year government bond rose marginally by 1 basis point (bp) during the quarter, yields on five-year and 15-year government bonds hardened by 11 bps. The three-year bond yield rose by 14 bps, and the yield on the 30-year bond increased by 6 bps over the same period. 

“On treasury income, we do not expect any material contribution this quarter. Despite the RBI’s rate cut, bond yields have not softened meaningfully, limiting month-to-month or trading gains. While some banks may dip into available-for-sale reserves if they are short on profits, treasury income will not be a major profit driver this quarter,” said Sachin Sachdeva, vice-president and sector head, financial sector ratings, Icra. 

The six-member monetary policy committee of the central bank reduced the policy repo rate by 25 bps in the December policy. In 2025, the policy repo rate was cut by a cumulative 125 bps. 

“On margins, October and November likely saw some improvement in net interest margins (NIMs) due to deposit repricing, while advances were largely repriced in September. However, the December rate cut, implemented early in the month, means repo-linked loans were repriced in December, offsetting much of the earlier NIM gains. As a result, the expected improvement in NIMs has been pushed out to the first quarter of 2026–27. For FY26 as a whole, we now expect a 10–15 bp decline in return on assets,” Sachdeva added. 

Government bond yields hardened in December, despite the RBI’s 25 bp policy repo rate cut and the announcement of large open market operations (OMOs) aimed at easing liquidity. Since the December rate cut, the yield on the 10-year government bond has risen 9 bps. 

The RBI has announced OMOs worth around ₹3 trillion, which were expected to support demand and help bring down yields. However, the benchmark 10-year government bond yield, which had briefly eased to around 6.52 per cent, has since moved back closer to 6.6 per cent. 

“With the easing cycle largely bottomed out and limited space for additional rate cuts, yields are unlikely to soften meaningfully beyond 6.4 per cent, especially in the backdrop of heavy state government borrowings. At the same time, in the absence of any restrictive policy stance, a sharp spike in yields also appears unlikely. The yield on the 10-year bond is expected to trade in a broad range of 6.4–6.8 per cent, with the upper end capped at 6.76–6.8 per cent,” said V R C Reddy, head — treasury, Karur Vysya Bank. 

The supply of central and state government securities has risen sharply in FY26, with net issuance exceeding last year’s levels, while demand from key long-term investors, insurance companies, and pension funds has weakened. 

Yields on fresh loans rose again in Nov 

Yields on fresh loans rose for two consecutive months now, with yields on fresh loans going up by 10 bps in November after yields rose 14 bps in October. Data shows, the weighted average lending rate (WALR) on fresh rupee loans edged up to 8.71 per cent in November 2025 from 8.61 per cent in October, while the WALR on outstanding rupee loans eased marginally to 9.21 per cent from 9.24 per cent over the same period. The one-year median MCLR of banks moderated to 8.45 per cent in December 2025 from 8.50 per cent in November. On the deposit side, rates on fresh term deposits remained largely stable. The weighted average domestic term deposit rate on fresh rupee term deposits stood at 5.59 per cent in November 2025, higher than 5.57 per cent in October.