Boost from Declining Yields and Forex Gains
Indian banks are expected to report higher treasury income in the fourth quarter of FY25, primarily due to a sharp decline in government securities (G-Sec) yields and profits from foreign exchange operations amid volatility. The gains mark a second consecutive quarter of treasury profits for banks, providing a significant boost to their non-interest income.
Government bond yields fell sharply in Q4FY25, boosting treasury income.
Banks also benefited from forex market volatility, generating higher profits.
This will be the second straight quarter of treasury gains for Indian banks.
Easing Yields Drive Treasury Profits
The 10-year benchmark government bond yield dropped by around 20 basis points (bps) during Q4FY25, closing at 6.582% on March 28, compared to 6.781% on January 1, 2025. The decline was driven by multiple factors:
Reserve Bank of India’s (RBI) open market operations (OMO) purchases, injecting liquidity into the system.
Easing inflation, which fell below the RBI’s medium-term target of 4% in February.
A 25 basis points policy rate cut, improving investor sentiment in the bond market.
“Softening of the 10-year benchmark yield during FY25, coupled with a sizable ₹2.46 lakh crore in OMO auctions, has significantly boosted treasury profits in Q4,” said V. Ramachandra Reddy, Head of Treasury at Karur Vysya Bank.
10-year G-Sec yield fell from 6.781% (Jan 1) to 6.582% (March 28), boosting bond prices.
RBI’s ₹2.50 lakh crore in OMO purchases helped banks offload securities at a gain.
Lower inflation and policy rate cut fueled further bond market rally.
Public Sector Banks Reap Maximum Benefits
Public sector banks (PSBs) have been the biggest beneficiaries of OMO auctions, as they actively participate in these transactions. The estimated treasury gains from OMO participation alone stand at ₹3,500 crore to ₹4,000 crore, according to analysts.
“PSU banks, being active participants in OMOs, have been the primary beneficiaries,” added Reddy.
PSBs saw treasury gains of ₹3,500-4,000 crore from OMO auctions alone.
Banks were able to sell G-Secs at a premium, boosting non-interest income.
RBI’s liquidity injection further improved the profitability of bond holdings.
Inflation and Forex Volatility Aid Gains
Inflationary trends also played a critical role in boosting bank profits. India’s retail inflation dropped to 3.61% in February 2025, marking the first time in two years that food inflation fell below 4%. The decline in inflation further supported bond market gains.
Additionally, heightened volatility in the Indian rupee helped banks book forex profits, which will be reflected in their “other income” category in Q4 earnings reports.
Retail inflation fell to 3.61% in February, the lowest in two years.
Lower inflation boosted investor confidence in the bond market, reducing yields.
Banks also earned forex profits due to rupee volatility, adding to overall earnings.
Banks That Benefited from Treasury Gains
In Q3FY25, several banks already reported strong treasury income, and analysts expect a similar or better performance in Q4FY25.
Bank of Baroda’s treasury income surged to ₹936 crore in Q3FY25 from ₹410 crore in Q3FY24.
Canara Bank reported ₹1,226 crore in Q3FY25, up from ₹495 crore in the year-ago period.
Punjab National Bank (PNB) and Union Bank of India also saw treasury gains in Q3.
With OMO purchases and yield declines continuing in Q4, banks are poised to report even higher non-interest income from their treasury operations.
What This Means for Banks and Markets
The positive treasury income will provide a much-needed boost to bank earnings, particularly for PSBs, as they continue to strengthen their balance sheets. The trend also indicates:
Stable interest rates: With inflation under control, the RBI may hold rates steady for an extended period.
Stronger bank earnings: Treasury profits will complement core lending income, leading to robust Q4 results.
Continued investor optimism: The bond market remains favorable, benefiting banks holding long-term securities.
Higher treasury income will improve banks’ overall profitability in Q4FY25.
Lower inflation and stable monetary policy may keep bond yields in check.
PSBs will likely continue to benefit from RBI’s liquidity measures and rate stability.
