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Banks are set to make treasury gains in the April-June quarter as government bond yields softened over the quarter. However, gains might be limited because of the new investment norm that came into effect from the current financial year starting April 1, said market participants.
The yield on the benchmark 10-year government bond fell by 6 basis points during the period on the back of foreign inflows ahead of JP Morgan bond index inclusion.
The yield on the 5-year government bond softened by 4 basis points, while that on the 7-year bond fell by 1 basis point during the April-June period.
“Treasury gains will be there, but due to the new investment guidelines, the investments in the held for trading (HFT) category will only give the P&L benefit,” said V R C Reddy, head of treasury at Karur Vysya Bank. “Gains will be there but it will be limited when compared to the previous year,” he added.
The revised norms permit banks to categorise their entire bond investment portfolio into three classifications: held-to-maturity (HTM), available-for-sale (AFS), and fair value through profit and loss (FVTPL). The new regulations integrate the existing sub-category of held-for-trading into the last category.
After transitioning to this framework, banks are not allowed to reclassify investments between categories (viz. HTM, AFS, and FVTPL) without the approval of the boards, as well as from the regulator.
The norms mandated that securities that are classified under the HFT sub-category within FVTPL should be fair valued on a daily basis, whereas other securities in FVTPL will be fair valued at least on a quarterly, if not on a more frequent basis.
Under the new norm, banks must categorise bonds as “held-to-maturity” on a permanent basis, with the exception of 5 per cent of the portfolio that can be withdrawn throughout the year. Any deviation from this rule requires approval from both the bank’s board and the Reserve Bank of India (RBI).
Earlier, banks were allowed to reclassify their investments between categories once a year on the first day of the financial year, through which they used to book capital gains.
In the second quarter, market participants see the yield on the benchmark bond softening further on the back of optimism around foreign inflow and the budget.
“The optimism around the budget is still going strong that it might have some surprises. I believe the government is less likely to change the borrowing, but optimism is still there,” said Naveen Singh, vice-president of ICICI Securities’ primary dealership. “I see the yield (benchmark bond) moving toward 6.90 per cent in the second quarter,” he added.
First Published: Jul 04 2024 | 7:09 PM IST