Banks may post hefty treasury gains in Q1FY26, helped by RBI rate cut

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26 Aug, 2025 12:21

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Banks may post hefty treasury gains in the results for the first quarter of the current financial year, as two rate cuts by the Reserve Bank of India between April and June have helped bring down yields on government securities, treasury heads and analysts have said.

Usually, a repo rate cut by the central bank reduces the yield on government securities, helping banks gain on their investment in these instruments. A fall in bond yield leads to a rise in bond prices due to an inverse proportionality.

“Banks are expected to report higher treasury income in Q1FY26, supported by the RBI’s OMO purchases amounting to Rs 2.45 lakh crore during this quarter, and a softening of bond yields,” said V Ramachandra Reddy, DGM - Head Treasury at Karur Vysya Bank.

In Q1FY26, the central bank has reduced repo rate by 75 bps to support growth, with 25 bps in April and 50 bps in June. In response to this rate cut, only 20 bps yields have reduced on the government securities.

Before the rate cut in April, yield on the 10-year government bond was trading at 6.484 percent, which eased to 6.288 percent after the June repo rate cut. Further, sale of securities to the RBI in the open market operations (OMO) auctions have also helped banks to gain some profits, banking analysts said.

Since start of the calendar year, RBI has purchased Rs 4.84 lakh crore worth of government securities from banks under OMO auctions.

Experts said state-owned banks, who were the major participants in the OMO purchase auctions, are expected to gain the most in terms of treasury income.

Yield on the government securities also fell due to systemic liquidity turning in to surplus since April due to continuous support by RBI through OMOs and USD/INR Buy/Sell swap auctions. Along with this, government securities redemption, coupon payments and month-end spending of government towards salaries and pensions too have helped.

Through USD/INR Buy/Sell swap auction, the central bank injected $25.2 billion to the banking system.

Sachin Sachdeva, Vice President, Sector Head - Financial Sector Ratings at ICRA cited RBI data that the PV01 of the AFS portfolio of the banks (including private, public and foreign banks) stood at around Rs 380 crore as on September 30, 2024, and with around 50 bps of decline since then, the realised and unrealised gains for banks could be upwards of Rs 19,000 crore. PV01 (Price Value of 1 bps) measures how much the market value of a bank's investment portfolio - specifically the Available for Sale (AFS) category - changes for every one basis point change in interest rates.

ICRA’s Sachin Sachdeva said banks may or may not choose to book these unrealized gains and the impact of profitability would depend on the management’s decision regarding realization of profits or adding the mark to market valuation directly in AFS reserve, to take care of adverse movement in yields at a later date.