Banks' bond income set to crash 60%

What is treasury income?

Treasury income is the money a bank makes from its bond portfolio. Banks take a portion of customer deposits and buy government bonds as a safe parking spot, earning interest on them and trading them for gains. When bond yields rise, older bonds paying lower interest fall in value, shrinking these gains, which is why Indian banks' treasury income is set to drop 58%.

How much did banks' treasury income fall?

Banks' treasury income (profits from trading government bonds) fell about 58% in the July-September quarter, to ₹5,500 crore from ₹13,100 crore a year earlier. That's also 23% below the previous quarter's ₹7,100 crore. The drop came as bond yields rose, making existing bonds less valuable.

Why did Indian bond yields rise when global yields often fall?

India's bond yields rose because of domestic inflation driven by higher oil prices. India imports most of its oil, so when crude prices spike, import costs rise and fuel inflation. To combat this, investors expect the Reserve Bank of India (RBI, the central bank) to keep interest rates higher for longer, making older, lower-paying bonds less attractive, so their prices fall. Global yields often fall from a flight to safety, but India's story is about inflation expectations.

Why does the government care about bond yields?

The government borrows heavily by selling bonds, gross market borrowings are estimated at ₹14.01 lakh crore (about $168 billion) for 2024-25. When yields rise, new borrowing costs more, widening the fiscal deficit (the gap between spending and revenue). The government has committed to bringing the deficit below 4.5% of GDP by FY26. High yields inflate interest payments, making that target harder to hit and leaving less room for spending on growth priorities.

Why do banks lose money when interest rates rise?

A bond is a promise to pay a fixed sum yearly until it matures. If rates rose from 6% to 7%, old bonds paying 6% become less attractive; buyers pay less for them, so their price falls. Banks holding these bonds see their value drop, shrinking profits they'd make from selling them. This is what's squeezing Indian banks' treasury income.

Which banks were hit hardest?

Public sector banks are expected to feel it most, since they hold bigger portfolios of government securities and had made larger treasury gains when yields fell earlier. Their drop from that higher base is steeper.

Is this about lost faith in India or just oil prices?

Not lost faith. India's bond yields rose because of higher oil prices, which fuel inflation. India imports most of its oil, so investors expect the RBI (the central bank) to keep interest rates high. That makes older, lower-paying bonds less attractive, so their prices fall, and banks lose income.