Budget borrowing numbers: Banks may see treasury gains in Q4

Treasury Income

Banks’ treasury income is likely to rise in the January-March quarter of 2023-24 in the wake of a fall in bond yields and prospects of a further drop given lower-than-expected market borrowing announced by the government in Budget 2024, experts said.

The yield on the 10-year benchmark bond (7.18 percent) maturing in 2033 was traded 11 basis points lower since the budget announcement.

“Due to large holding of government securities by the PSU banks, the fall in yield is likely to help them report a rise in their treasury income in the current quarter,” said V. Ramachandra Reddy, head, of treasury, Karur Vysya Bank.

In Budget 2024, Finance Minister Nirmala Sitharaman announced a gross market borrowing of Rs 14.13 lakh crore for the financial year 2024-25 to bridge its fiscal deficit, while the net market borrowing was pegged at Rs 11.75 lakh crore.

The gross borrowing target for next year is lower than this year's budget estimate of Rs 15.43 lakh crore. “Both will be less than that in 2023-24,” Sitharaman said in her budget speech on February 1.

The government has announced the revised estimate of fiscal deficit at 5.8 percent of GDP, compared with 5.9 percent projected earlier, notwithstanding moderation in the nominal growth projection.

In an election year, the government presents only an interim budget or seeks a vote-on-account, and leaves it to the next government to present the full budget.

Also read Paytm crisis: Won't comment on one company, but govt is enthusiastic about fintech, FM tells Network18

Why did yields fall?

Apart from the lower borrowings projected, the yield on government securities dropped due to the lower predicted fiscal deficit numbers, experts said.

Soon after the budget speech, the yield on government bonds, especially 10-year bonds, fell sharply. The 10-year benchmark 2033 bond yield fell 8 basis points (bps) immediately after the announcement.

The benchmark bond yield is now trading at 7.0366 percent.

Yields will remain lower due to the strong demand from foreign investors after the inclusion of Indian bonds in the JP Morgan bond index, experts said.

“Demand-supply dynamics for government securities (G-Secs) remain favourable even after building in higher net SDL (state development loan) supply, which is a sign of lower interest rates ahead,” said Ashwani Dhanawat, chief investment officer, of Shriram General Insurance Company.

The range for benchmark bond yield

By the end of this quarter, most market participants foresee benchmark bond yields remaining in the range of 6.90-7.05 percent and falling in the next financial fall to 6.50 percent.

This is on account of higher demand from foreign investors in 5-14-year securities and a strong appetite for paper beyond 14 years from the pension funds.

“We expect the benchmark yield to trend towards 6.5 percent,” said Kaustubh Gupta, co-head, of fixed income, Aditya Birla Sun Life AMC.

Will the RBI step in?

That is a strong possibility, with money market experts believing that if there is a steep drop in government bond yields in the next financial year due to a lot of positive factors, the Reserve Bank of India (RBI) would intervene by selling bonds.

“We expect the RBI to sell bonds to buffer the sharp fall in yields. However even then, the yield fall should be significant,” said Sandeep Yadav, head, of fixed income, at DSP Mutual Fund.

Also read: White paper on UPA's economic mismanagement to be tabled: FM

Increase in banks’ SLR investment

Moneycontrol on January 25 reported that Indian banks had increased investments in statutory liquidity ratio (SLR) securities in the third quarter of FY24 due to a rise in deposits and a stable yield in the government securities market.

Anticipation that yields would come down due to the inclusion of Indian bonds in the JPMorgan bond index also pushed banks to increase their SLR investments, experts said.

SLR refers to the percentage of total deposits that commercial banks must invest in liquid assets such as central and state government securities and treasury bills.

Indian Bank, IDBI Bank, Union Bank of India, ICICI Bank, Canara Bank, Indian Overseas Bank, South Indian Bank, and Karur Vysya Bank hiked their investments in SLR securities in the October-December quarter, according to data compiled by Moneycontrol.

The surge in investment remained up to 29 percent every year in the reporting quarter, the analysis showed.