As bond yields in India hit their highest levels this fiscal year, banks are facing significant mark-to-market losses, threatening profits amid rising global and domestic economic pressures.
Indian banks are heading into the September quarter with treasury books under strain as a sharp sell-off in government bonds pushes up mark-to-market losses and threatens to erase part of the gains booked earlier in the year. The pressure comes at a time when lenders are already weighing the impact of tighter financial conditions, volatile foreign flows and a cautious policy outlook ahead of the Reserve Bank of India’s next meeting. According to Business Standard, the benchmark 10-year government bond ended September at 7.19 per cent after a steep quarterly rise in yields, a move that is expected to hit banks with larger investment portfolios most heavily.
The rise in yields was broad-based. Business Standard said the 10-year benchmark climbed 43.8 basis points during the quarter, while the 5-year yield increased 46.8 basis points to 6.89 per cent. The 7-year and 15-year notes also moved higher, by about 50 basis points and 40 basis points respectively. The benchmark yield touched 7 per cent on September 11, reflecting a mix of factors that included a global bond sell-off, firmer crude prices and weakness in the rupee. An oil-driven inflation scare and expectations of a possible policy move by the central bank added to the sell-off, according to the report.
That backdrop has direct consequences for bank profit and loss accounts. When yields rise, bond prices fall, forcing lenders to mark down securities held in available-for-sale and trading portfolios, which creates accounting losses. A treasury head at a private bank told Business Standard that the increase in yields would lead to mark-to-market losses, with institutions holding larger available-for-sale books taking the biggest hit. The banker added that a significant part of the gains recorded in the first quarter could be offset. Securities classified as held to maturity are not marked to market, which limits the damage for banks with a larger share of that category.
The macro setting has been equally unfavourable. Foreign investors continued to sell Indian debt and equities, while the rupee weakened enough for the Reserve Bank of India to intervene in foreign exchange markets. India’s foreign-exchange reserves dropped sharply in the week to September 25, according to the figures cited by Business Standard. Domestic inflation also remained a concern, with retail prices rising to 4.82 per cent in August. The Economic Times said the 10-year government bond posted its biggest monthly rise in FY27, driven by higher oil prices and bets on rate increases, while another Economic Times report quoting Crisil said Indian banks’ return on assets could fall by as much as 0.15 percentage points in FY27 because of weaker treasury income and higher provisions. That broader pressure suggests the bond market rout may do more than dent one quarter’s trading results: it could also weigh on bank profitability well into the rest of the financial year.
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