The yields on 10-year government securities (G-Secs) have surged by over 35 basis points (bps) since January. In March itself, it hardened by 28 bps.
The yields on benchmark 5-year and 15-year government bonds have hardened by 34 bps and 32 bps, respectively, during Q4.
State-owned lenders and some large private sector banks may still face some mark-to-market losses, but those that have participated in OMO purchases or switch operations are expected to be better placed to cushion the impact, market participants said.
“There will be losses as current yields are close to the peak levels seen in 2022 when the RBI was hiking rates. Most bond holdings that have not been sold would now be out of the money,” said a senior executive at a primary dealership. “If banks had booked profits when the RBI was buying bonds, then on a net basis, they might still have been in a loss position, but the hit could have been moderate. Effectively, a large part of the mark-to-market losses has been absorbed by the RBI. Had these OMOs not taken place, the market would have been sitting on large losses today,” the person added.
On Friday, the yield of the 10-year government bond closed at 6.94 per cent. The yield on the 10-year bond was at 6.58 per cent at the end of March last year.
Market participants said RBI’s aggressive bond purchases have played a key role in cushioning losses. The central bank is estimated to have purchased nearly ₹9 trillion worth of bonds in FY26 at yields roughly 25-30 bps lower than current levels.
“Given the recent surge in yields, some banks, particularly public sector lenders and a few large private banks, may report treasury losses this quarter, although these are unlikely to be substantial. Institutions that have participated in OMO purchases or switch operations could see some cushioning, while others may face pressure on their treasury books,” said a market participant.
Government bond yields exhibited a two-phase movement in the quarter, with an initial softening trend followed by a sharp hardening toward the end of the period. In January and early February, the benchmark 10-year yield largely traded in a narrow range of 6.65-6.70 per cent. Following the RBI’s policy in early February, yields edged higher as the absence of immediate bond purchase support and expectation of end of the rate cut cycle weighed on market sentiment.
Yields softened modestly through February, supported by surplus system liquidity and large OMO purchases by the central bank. However, this trend reversed sharply in March, when yields rose amid a confluence of global and domestic factors, including the escalation of tensions in West Asia, a spike in crude oil prices, rising US Treasury yields, rupee depreciation, and foreign portfolio outflows.
The RBI deployed a mix of tools to cool yields, including large-scale OMO purchases and announcements of substantial bond buying in March, which helped cap yields and inject durable liquidity into the system.
"Banks would have booked profits in the OMOs, which were fairly large,” said the treasury head at a private bank.
The central bank also carried out secondary market purchases during periods of stress, providing support to bond prices amid heavy supply and liquidity pressures. In addition, the government, in coordination with the RBI, undertook switch operations to smoothen the maturity profile of its debt by exchanging short-term securities with longer-duration bonds. While these measures helped prevent disorderly movements and anchored yields at various points, persistent supply pressures and global volatility limited their effectiveness, leading to a firming bias in yields towards the end of the quarter.
 "RBI, Reserve Bank of India")