Banks may take a hit on their MTM portfolios in Q4 if the yields stay high. The high retail inflation could cause a spike in G-sec yield by another 10 basis point. But the bigger trigger will be budget.
Bond yields may inch up further by another 10-15 basis points till the Union Budget as high retail inflation has reduced the chances of a rate cut by the RBI, bond dealers said. This could put some pressure on the treasury income of banks in the fourth quarter. But the picture will be clearer only after government guidance in the Union budget. on how much it plans to borrow in the coming fiscal
“The inflation print has gone beyond the expectation and this will mean there is no point in hoping for a rate cut at this stage. There is a likelihood of 10-year G-Sec yield rising to 6.80-6.84 percent till Budget,” said SV Sastry, MD and CEO, SBI DFHI. On Tuesday, the yield on India’s 10-year government bond rose to 6.696 percent intra-day, up 10 basis points from its previous close of 6.598 percent.
Banks’ MTM gains may take hit
According to Sastry, since March, the yield on 10-year paper has been easing helping banks to make mark-to-market (MTM) gains on their bond portfolio. That is because when interest rates fall, the price of the older bonds appreciate because they offer a higher rate of interest. Conversely, when interest rates rise, the price of the older bonds drop because buyers will go in for the newer bonds offering a higher rate of interest.
Banks portfolios are marked-to-market, which means the value of the portfolio reflect the latest market prices of the securities in its portfolio.
“In the fourth quarter, if yields continue to inch up, this gain may come down a little bit,” Sastry said.
Retail inflation, accelerated to 7.35 percent in December hit by rising food prices. Food inflation rose to 14.12 per cent in December as against 10.01 percent in the preceding month while core inflation that excludes volatile components inched upto 3.54 percent in December.
Dealers said ‘Operation Twist’ by the RBI, wherein central bank bought long-term bonds and simultaneously selling short-term bonds, did help keep yields within a range. Since the operation was first announced on December 19, 10-year G-Sec yields have fallen by about 20 basis points from 6.746 percent to 6.551 percent but spiked by about 10 bps post the high inflation numbers . So far, in three tranches of 'Operation Twist', the RBI has bought bonds worth Rs 30,000 crore and sold Rs 25,326 crore worth of securities.
Harihar Krishnamoorthy, treasurer and head of global markets at FirstRand Bank said it is certain that banks will take a hit on their marked-to-market (MTM) portfolios in Q4 if the yields stay high, adding that high retail inflation could cause a spike in G-sec yield by another 10 basis points. But the bigger trigger will be budget.“If the government spends more money, that might cause more supply in bond market, which in turn will push the yield closer to 7 percent. If they spend less, yields will remain low. That may have an economic implication but bond market will be delighted with it,” Krishnamoorthy said.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.