Interim Budget effect: Thaw in yields may support Banks’ bottomline in Q4FY25

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The FY25 interim budget’s lower fiscal deficit projection, which will result in reduced government borrowing, could yield decent treasury gains for Banks in the fourth quarter of FY24, say debt market experts.

For example, the 12 basis points thaw in the 10-year benchmark Government Security (7.18 per cent GS 2033) between December-end 2023 and up to February 2, 2024, roughly translates into a gain of about 84 paise if this security (of ₹100 of face value) is sold. This can boost Banks’ bottomline.

As of January 12, 2024, all scheduled banks’ held G-Secs and State government securities amounting to ₹61,48,380 crore, according to RBI data.

In the current quarter, most of the yield compression on Government securities (G-Secs/GS) happened on February 1 after Finance Minister Nirmala Sitharaman, in her interim budget speech, announced a lowering of the FY24 fiscal deficit target from 5.9 per cent to 5.8 per cent of GDP.

Further, as a sign that the government will continue on the fiscal consolidation path, the fiscal deficit target for FY25 has been pegged at 5.1 per cent, translating into lower borrowings vis-à-vis FY24.

Treasury gains

Referring to the government’s move towards fiscal consolidation and lower market borrowings in FY25 vis-à-vis FY24, ICRA assessed that Banks should benefit through treasury gains in Q4 (January-March) FY24 and beyond if the yields remain benign.

However, a decline in bond yields could lead to higher competition for banks and constrain their ability to pass on the rising cost of deposits to borrowers as borrowings through debt capital markets may become attractive, it added.

“A meaningful shift to debt capital markets by larger corporations could also lead to slower credit growth and may constrain earnings growth momentum,” the credit rating agency opined.

Fiscal deficit and lowering of Government borrowing will support profitability of banks, said Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India

Gross and net market borrowings for FY25 are pegged at ₹14.1-lakh crore (₹15.4-lakh crore in FY24) and ₹11.75-lakh crore (₹11.80-lakh crore), respectively.

The Bank of Baroda’s economic research team noted in a report that the share of gross market borrowing in financing the overall fiscal deficit has gone down to 83.6 per cent as per FY25BE (budget estimate) from 89 per cent in FY24RE (revised estimate).

“This is indeed comforting for yields. A excess supply of papers tends to put pressure on yields,” they said.

BoB economists expect downside pressure on yields, with the possibility of yields moving even below the 7 per cent mark.

“Yields will also get support once flows start picking up in the debt market due to inclusion (of G-Secs) in JP Morgan’s EM Index and also talks of inclusion in the Bloomberg EM Local Currency Index,” per the report.

BoB economists opined that this is also positive for banks, which are the major holders of government securities. As more players participate in the market, it will lead to the freeing of more funds on the part of the banks, which in turn will support credit demand.