MC EXPLAINER Why treasury income of banks is expected to fall in Q2? Here are three reasons

Even though the RBI has reduced the repo rate by 100 bps, the bond yields have hardened in the July-September. This has led to expected shrinking of treasury gains for the banks in Q2FY26.

Whenever the bond yields rise, prices fall due to inversely proportional relationship between both. This leads to lower mark-to-market gains on the investment of banks in these securities.

According to the Clearing Corporation of India’s (CCIL) data, bond yields, especially 10-year benchmark bond yield hardened by 25 bps in July-September quarter.

Why bond yields hardened?

The bond yields have hardened due to global as well as domestic factors such as US tariffs related uncertainty, RBI’s hawkish stance on inflation and concerns over higher government borrowing amid tax reforms.

Although bond yields typically fall when interest rates are reduced, the market’s reaction has been different this time. When bond yields rise, it usually indicates falling bond prices, reflecting investor selling pressure.

The rising bond yields typically reduces the returns on the investment of investors.

Why banks reported heft gains in Q1?

Banks posted hefty treasury gains in 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

Usually, a repo rate cut by the central bank reduces the yield on government securities, helping banks gain on their investment in these instruments.