Public sector banks (PSBs) are set to enjoy substantial gains in their treasuries as G-sec yields are expected to slide following JP Morgan’s decision to include India in its emerging-markets bond index.

The anticipation of this inclusion already pushed the ten-year G-sec yields down from 7.28 per cent on September 18 to 7.08 percent on Friday after the index inclusion news.

Market gains

PSBs are likely to benefit from marked-to-market gains in their treasuries for the September quarter, with some even considering booking substantial profits by selling their bond holdings, a banking industry insider said.

This yield decline may also prompt some PSBs to pay off high-cost debts by reducing their government bond holdings.

The inclusion of India in JP Morgan’s EM index is expected to boost demand for government bonds and keep a lid on bond yields, said Churchil Bhatt, Executive Vice President and Debt Fund Manager, Kotak Mahindra Life Insurance Company.

PSBs, in particular, keep a higher Statutory Liquidity Ratio (SLR) and hence may benefit a bit more in comparison to the rest, he added.

Also read: JPMorgan includes India in emerging market debt index: Here’s what analysts said

G-Sec yields

While the magnitude of treasury gains will vary among banks based on their balance sheet positions, it’s certain that JP Morgan’s decision will put a cap on yield increases. Analysts predict further declines in ten-year G-sec yields to 6.75-7 per cent in the second half of the current fiscal year.

An IDFC First Bank’s research note issued on Friday suggests that the 10-year G-sec yields could reach 7 percent by March 2024, with the index inclusion news acting as a limit. If inclusion in the Bloomberg Global Aggregate Index is also announced, yields could fall below 7 percent by March 2024, the note added.

As much as $23.6 billion of Foreign Portfolio Investors (FPI) inflows (mostly passive investments) are expected over July 2024 to May 2025 on account of this JP Morgan move to include India in its bond index.

Positive outlook

This inclusion by JP Morgan adds to the positive outlook for PSBs, which are already on track to surpass their previous fiscal year’s record profits of little over ₹1 lakh crore. With treasury gains and credit expansion, PSBs recorded a remarkable 124.8 percent increase in net profit during the first quarter, totaling ₹34,418 crore.