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Will banks incur treasury losses after RBI policy?

The pressure could be felt both in the July-September quarter and October-December quarter, if not extended by another three-month period.

, ET Bureau|
Updated: Oct 05, 2017, 09.39 PM IST
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MUMBAI: Tepid credit demand and ballooning sticky loans have made Indian banks increasingly reliant on treasury incomes for lending respectability to their bottom-lines. Over the next couple of quarters, even that lifeline may not be available, with sovereign yields rising in Asia’s third-biggest economy.

“Bearish sentiment is currently there in the bond market,” said Piyush Wadhwa, head of rates trading at IDFC Bank. “The upside is limited, with the central bank hinting that there would no immediate rate cut. Traders have cut their positions. It will be difficult for banks to show large treasury gains in the environment.”

The pressure could be felt both in the July-September quarter and October-December quarter, if not extended by another three-month period.

The Reserve Bank of India (RBI) has hinted that there is little scope for further rate cuts, flagging inflation risks in its bi-monthly monetary policy, a move that will trigger no immediate bond market rally.

The RBI has revised its retail inflation projection as the central bank now sees the consumer price index touching 4.7% by the end of the current financial year due to enhanced house rent allowances that government employees are now entitled to. The gauge was earlier seen at 4.2%.

The benchmark sovereign bond yield has shot up about nine basis points, pulling prices down in the past two trading days since Wednesday. It closed at 6.73% on Thursday, a level 30 basis points higher since July 25.

“Banks’ treasury trading gains may not be available in view of rising yields,” said Ashutosh Khajuria, executive director Federal Bank. “Banks that held huge excess SLR bonds are likely to take more hits. Interest rates have probably bottomed out, going by RBI’s assessment of growth and inflation.”

Some private sector banks and bond houses were seen cutting their trading positions, with many booking marginal losses. State-owned banks and insurers, long term investors rushed to buy as they aimed to cost-coverage their holdings with rising yields.

Statutory Liquidity Ratio, or the portion of deposits banks are mandated to invest in government bonds, is now at 19.50% after the central bank cut it by 50 basis points Wednesday.

Many mid-sized government-owned banks are said to be holding SLR as high as 27-28%, dealers said. They may now have to book mark-to-market losses as those securities were mostly bought at much lower yields.
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