Some banks may report trading losses, potentially resulting in larger mark-to-market (MTM) losses in terms of provisioning due to the recent surge in yields, which have been driven in part by the persistent uptrend in US yields.
The yield on the benchmark 10-year US Treasury bond surged by 73 basis points (bps) throughout the July-September period. In comparison, the yield on the 10-year benchmark government security in India rose by 10 bps during the quarter, settling at 7.22 percent by the end of Friday. Yields on other government bonds also saw increases, with the 5-year paper hardening by 15 bps and the 14-year bond witnessing an 11 bps uptick.
Global factors
Global factors have not been supportive during the second quarter, as central banks worldwide raised interest rates due to persistent inflationary pressures and economic data not meeting expectations.
The rise in yields aligns with the hawkish stance adopted by central banks globally. Previous expectations of rate cuts by the Reserve Bank of India (RBI) in the third or fourth quarter have been pushed further out. This has contributed to the recent spike in bond yields, despite India’s inclusion in the bond index.
In contrast, the first quarter saw a 19 bps decline in the benchmark yield, driven by overall positive market sentiment after the RBI’s decision to maintain the repo rate at 6.50 percent during its April 6 meeting. This pause in the rate hike cycle, following six consecutive rate hikes totalling 250 bps since May 2022, led traders to accumulate government bonds in anticipation of a future rate cut.
While global uncertainty surrounds the peak and duration of interest rate increases, domestic conditions in India remain stable. Inflation is expected to drop below 6 percent for September, supported by a steady currency exchange rate.
