Banks are looking for a specific dispensation for their bond portfolios since they depreciate due to rising interest rates. This makes sense that this is impacting their profitability and share prices. Spreading provisioning obligations, computing treasury losses after determining operating earnings, and extending the deadline for decreasing the cap on the percentage of bonds they can keep until maturity are some options being considered.
The Reserve Bank of India (RBI) has given banks more than a year to increase the proportion of their gilt holdings that must be marked to market, so the first course of action has precedent.
A special treatment for treasury losses during tightening liquidity may not be in the shareholder’s best interest. Banks have made sizable treasury profits while bond yields have been low.
Additionally, since inflation peaked in the first quarter, the central bank’s subsequent interest rate measures might be less aggressive. Banks may have suffered the worst in terms of the notional hit to their bond portfolios.
As lending rates have increased nearly twice as quickly as term deposit rates, demand for bank credit has outpaced supply. As a result of the central bank’s expanded balance sheet, banks are supplying the credit demand with additional liquidity. Banks will need to raise their capital to adapt to the normalisation of policy, as Shaktikanta Das has noted.
As it drains liquidity, the central bank prods the market to revalue credit risk. This is crucial for policy normalisation, which calls for adding liquidity management to interest rate changes. Systemic liquidity should move toward a little surplus as it nears the terminal interest rate.
With fiscal support against supply shocks, the RBI must achieve core inflation goals. For monetary contraction to occur, a responsive transmission mechanism is required. Quantitative easing is more likely to make financial markets adapt than tightening. This strange behaviour needs to be fixed by central banks.