Here’s how RBI’s latest move helped rising bond yields to calm down

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Updated: April 3, 2018 2:07:38 PM

In a major relief to the country’s sovereign bond market, the Reserve Bank of India (RBI) on Monday allowed banks to spread the mark-to-market (MTM) losses for 3Q and 4QFY18 over the next four quarters helping the bond yields to stabilise.

The erratic movements in the bond yields over the last three months have hit profitability of banks in the third quarter.

In a major relief to the country’s sovereign bond market, the Reserve Bank of India (RBI) on Monday allowed banks to spread the mark-to-market (MTM) losses for 3Q and 4Q FY18 over the next four quarters helping the bond yields to stabilise. The banks will now have to create a buffer for future losses by establishing  an Investment Fluctuation Reserve (IFR) which shall be a minimum of 2 percent of the total AFS and HFT portfolio, RBI circular said. The erratic movements in the bond yields over the last three months have hit profitability of banks in the third quarter.

“The recent circular provides banks some  respite, in the near term. We believe banks that were badly hit owing  to huge MTM provisions in 3Q will use this relaxation to write back a part of the cumulative MTM losses (3Q and 4Q) and apportion it over  FY19. The leeway in 4Q will be used to provide for stressed assets,” HDFC Securities said in a note.

At 9.15 am, yield on 10-year government bonds was at 7.322 percent, down 0.079 basis points from its last close on Wednesday at 7.399 percent. Markets were shut for last 5 days since Wednesday due to public holidays.

It was in March last month that global brokerage Credit Suisse had said that public sector banks of India could be hit by a loss of over Rs 20,000 crore in the January-March quarter, due to a continued rise in bond yields.

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