RBI rejects banks’ request to spread out Q4 treasury losses

The Reserve Bank of India (RBI) rejected banks’ plea to spread provisions for likely mark-to-market (MTM) losses from treasury operations in the fourth quarter, people familiar with the matter said.

Banks had sought regulatory approval to soften the dual impact of losses arising from a sharp rise in government bond yields during the March quarter and imposition of a $100-million cap on net open positions (NoP) just days ahead of the financial year-end.

Treasury heads of large banks argued that the hardening of government securities yields was driven by external factors stemming from the West Asia crisis, while foreign exchange losses resulted from the unwinding of positions following the unexpected NoP directive.
Banks sought this dispensation during a meeting with the regulator where they had urged for an extension to the April 10 deadline for capping NoP at $100 million.

Bankers said RBI rejected the request because it did not want the performance of one fiscal year to spill over into another.

The central bank did not respond to ET ’s request for comment.

The March quarter was marked by heightened uncertainty across financial markets. Benchmark bond yields hardened sharply by 45 basis points to close at 7.03%, the rupee fell 5% to close at 94.83 against the US dollar while equity indices corrected by nearly 11%.

“In such an environment, treasury portfolios typically face MTM pressures rather than generating profits,” said VRC Reddy, treasury head at Karur Vysya Bank. “Accordingly, most banks are likely to report fairvalue losses, with depreciation in the AFS book being absorbed through AFS reserves. While treasury gains are expected to be muted in Q4, the extent of losses will vary depending on the size and positioning of trading portfolios across banks.”

Analysts expected some banks to report muted treasury gains and others to post losses in the fourth quarter. “In our 4QFY26 preview, we expected banks to report profit after tax growth of only 5% year-on-year, as revenue growth will be subdued due to net interest margin decline following the December 2025 rate cut and materially lower treasury gains due to the spike in bond yields,” IIFL Capital said in a research report.

In April 2018, RBI allowed banks to spread provisions on MTM losses on investments held in the Available for Sale (AFS) and Held for Trading (HFT) portfolios over four quarters after yields rose 67 basis points and bond prices fell. Since that directive was issued at the beginning of the year, the treasury losses were absorbed within the same fiscal year. Reddy said treasury gains are likely to remain limited in the first quarter of the current fiscal due to the prevailing hardening bias in yields.

“Some banks may also face losses from the unwinding of NDF positions (exposure in non-deliverable forward currency contacts). However, the current yield environment provides an opportunity to deploy incremental funds and reinvest maturities at higher yields, which should support an improvement in interest income going forward,” he said.