Banks are set to record higher treasury gains for the quarter ended December, compared to profits booked in the quarter ended September.
These gains would be under the available-for-sale (AFS) portfolio of gilts. Under AFS portfolios, gilts are purchased with the intent of selling these before maturity. According to treasury heads of banks, the decline in gilt yields in this period would lead to gains.
Compared to private banks, public sector banks would record more gains. “More than 30 per cent of their (public sector banks) gilt holdings are in the AFS portfolio. So, they will benefit more,” said Vaibhav Agrawal, vice-president (research), Angel Broking.
The average duration for the AFS portfolio was four to five years, said the treasury head of a public sector bank. Usually, these portfolios comprise liquid gilts, including the 10-year benchmark gilt.
The yield on the five-year gilt fell 14 basis points between October and December, while the yield on the 10-year benchmark 8.15 per cent gilt fell 11 basis points in the same period. “A one-basis point fall in the five-year gilt yield results in the price rising by four paise; for the 10-year benchmark gilt, a fall of one basis point leads to the price rising by seven paise,” said Anoop Verma, vice-president, Development Credit Bank.
The factor that contributed most to the fall in yields was the fact that the issuance calendar for marketable dated securities for October-March, announced by the Reserve Bank of India on September 27, was according to the figure announced in Budget 2012-13.
The government had stuck to its borrowing target and had announced borrowings worth Rs 2 lakh crore through gilts in the second half of the financial year, raising gross borrowings for the financial year to Rs 5.7 lakh crore.
Liquidity-easing measures by RBI also helped reduce gilt yields. On October 30, RBI had cut the cash reserve ratio (CRR) by 25 basis points to 4.25 per cent of net demand and time liabilities, effective November 3. The reduction had injected about Rs 17,500 crore into the system. RBI also purchased gilts through open market operations (OMOs). In December, RBI had infused Rs 39,057 crore through OMOs.
It is expected gilt yields would fall further in the quarter ending March, and this would add to treasury gains. In the third quarter review of monetary policy on January 29, the Street expects RBI to announce a 25-basis point cut in the repo rate. The cut was expected to result in the yield on the 10-year benchmark falling to 7.85 per cent, said gilt dealers.