The banking industry after being spooked with the worsening asset quality has now another cause of concern as the bond yields are soaring to reach new highs as after the hawkish comment of RBI's DG, the yields have further touched a new high when he blatantly says that every time RBI can't come to their rescue.
Read About What is Mark to Market?
Since the last three months of the calendar year, macro economic concerns first with the fiscal deficit due to regularly surging crude oil prices and then inflation is pushing constantly bond yields higher.
Why upward trajectory in bond yields incurs losses for banks?
Actually, bank have a large share in their portfolio of these government securities or benchmark 10-year govt bonds and with no cushion to absorb any changes in the interest rate, any hike in yield results in MTM losses for the bankers.
It is to be noted that 80% of the losses shall be accounted by public sector players in contrast of private counterparts.
Latest move in the bond market which spooked it and the banking stocks
The industry demanded complete exemption in repect of MTM lossed incured in the quarter ending 2017 as it had been approved by the authorities in the previous stance in the year 2013. But unlike the previous supportive measure, this time around RBI declined to provide any dispensation against the risk.
Banking and NBFC stock that were hit after the statement of RBI's DG comment soon reversed previous gains as on Wednesday reduced its additional borrowing requirement by more than half at Rs. 20000 crore, which uplifted the sentiments of the banking sector and the Sensex and Nifty scaled to new highs on the back of upbeat growth prospects through proposed changes in budget.2018.