Most bank treasuries are likely to end the last quarter of the current financial year on a moderately positive note as prices of government securities have moved up in response to key budget announcements relating to Government borrowing and fiscal deficit for 2011-12.

In the third quarter, bank treasuries had either reported a flat growth in treasury income or booked slight losses as government security prices came down due to rising interest rates.

The Union Budget for 2011-12 has pegged the net government borrowing a tad lower at Rs 3.43 lakh crore, as against Rs 3.45 lakh crore in 2010-11. The fiscal deficit projection for the next fiscal is lower at 4.6 per cent of gross domestic product, compared with 5.1 per cent estimated for the current fiscal.

These announcements have come as a relief to participants in the government securities market. A large government borrowing programme is viewed unfavourably due to its crowding out effect on present or potential private credit demand, resulting in higher interest rates in the economy.

Budget push

On the Budget day (February 28), buoyed by the announcement on the borrowing programme, yield on the benchmark 10-year government security (G-Sec) thawed by 6 basis points (one basis point equals 0.01 per cent) and its price rose by Rs 0.40 over the previous close. A bond's price and its yield are inversely related.

In the fourth quarter so far, yield on the benchmark 7.80 per cent 2020 G-Sec has come off substantially (by 21 basis points) to 7.93 per cent, compared with 8.14 per cent as of December-end 2010. In price terms, this security has gained Rs 1.33 over the December-end level. A host of other securities have also moved in tandem.

Bond yields

“Yields on government securities have turned favourable in response the lower government borrowing programme. So, it is unlikely that any bank will need to make market-to-market provisioning in the fourth quarter,” said a senior official with a public sector bank.

Bond yields are down solely because of the announcements in the Budget, according to Dr Golaka C Nath, Senior Vice-President and Chief Economist, Clearing Corporation of India Ltd.

“The yields are now close to the lowest ebb as all positive announcements that could impact the market have been made. There is unlikely to be an upward movement in yields from these levels unless there is a crisis on the oil price front. Yields may go down by another 5 basis points by March-end. This will translate into good profits for banks in the current quarter,” he said.

It is unlikely that the Reserve Bank of India may go for another rate hike to tackle inflation, in the immediate term at least, said the head of treasury of a large public sector bank. If there is no further rate hike, yields could soften a little more from the current levels.

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