Indian banks expect a nearly 60% drop in treasury gains for the September 2026 quarter as government bond yields hit 7.19%. The rising yields have triggered losses on investment portfolios, forcing investors to focus on core lending performance rather than trading income.
Indian banks are bracing for a sharp decline in treasury income for the quarter ending September 2026. Analysts project a nearly 60% year-on-year collapse in these trading gains, with aggregate profits from investment portfolios expected to fall to approximately ₹5,500 crore, down from ₹13,100 crore in the same period last year.
The decline is driven by a rapid rise in government bond yields, which rose by about 44 basis points over the quarter to settle near 7.19%. In the financial world, bond prices and yields move in opposite directions. When yields climb, the market value of the bonds already held by banks drops. This results in 'mark-to-market' losses, where the value of the bank's investment portfolio is written down on paper, directly reducing the reported treasury income.
This shift follows the Reserve Bank of India’s (RBI) decision on October 7, 2026, to raise the repo rate by 25 basis points to 5.50%. The central bank's move toward a tighter policy stance has pushed yields higher, effectively ending the period of easy trading profits that banks experienced earlier in the fiscal year.
While the drop in treasury income is significant, the overall health of the banking sector depends on core operations. Financial projections suggest that while loan growth remains healthy at around 19% year-on-year, overall profit growth is likely to be tempered to about 6% for the quarter. This highlights a clear divergence: the strength of lending is being partially offset by the weakness in investment portfolios.
Public sector banks are expected to feel the impact more acutely. These institutions typically carry larger holdings of government securities compared to their private sector peers, making them more sensitive to interest rate volatility. When rates remain stable or fall, these banks often see gains; however, in a rising interest rate environment, their portfolios face greater pressure.
For investors, this trend marks a shift in how to evaluate bank performance. As treasury windfalls become less reliable, the focus is turning back to core operational metrics. Analysts suggest that future profitability will depend more heavily on net interest margins—the difference between interest earned on loans and interest paid on deposits—and strict management of credit costs. Monitoring how well banks manage these core margins while navigating the current interest rate environment will be the primary challenge for the coming quarters.