Bank treasuries turn circumspect in buying G-Secs
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Multiple economic factors—including potential fiscal pressures from implementing the 8th Pay Commission recommendations, stricter investment regulations, and the RBI’s elevated inflation forecast for early FY27—have reduced bank treasuries’ willingness to purchase Government Securities (G-Secs).
Despite a cumulative 100 basis point (bps) repo rate cut between February and June 2025 and October 2025’s record-low retail inflation of 0.3%, G-Sec yields continue to climb.
Bank cautiousness is evident in their trading behavior and the cancellation of an October 31 G-Sec auction by the Reserve Bank of India (RBI).
Data from CCIL reveals a sharp decline in banks’ net G-Sec purchases to ₹849 crore (November 19, 2025) from ₹6,716 crore (June 6, 2025). This drop follows the RBI’s Monetary Policy Committee (MPC) cutting the repo rate by 50 bps to 5.50% on June 6.
The RBI called off an auction for ₹11,000 crore of 6.28% GS 2032 bonds after market participants demanded higher yields (lower prices than secondary market levels).
The benchmark 10-year G-Sec yield has risen 21 bps to 6.54% since its initial issuance in May 2025. Similarly, the earlier 10-year benchmark (6.79% GS 2034) saw yields jump from 6.29% (June 6, 2025) to 6.57% (November 20, 2025).
Arvind Kanagasabai, Head of Treasury at Tamilnad Mercantile Bank, highlighted a misalignment in banks’ interest margins. While banks have passed the full 100 bps repo rate cut to external benchmark-linked loans (constituting over 60% of floating-rate portfolios), deposit repricing lags. “With deposit costs exceeding current G-Sec yields of ~6.50%, banks lack incentive to invest,” he explained.
Kanagasabai added that the 8th Pay Commission’s salary and pension revisions (effective January 1, 2026) could trigger additional government borrowing exceeding ₹2 lakh crore, pressuring yields. He also noted RBI’s Q1FY27 inflation projection of 4.5%—above its 4% tolerance threshold—diminishes hopes for a December 2025 rate cut.
Regulatory Constraints
Karur Vysya Bank’s Treasury Head, V Rama Chandra Reddy, pointed to tightened investment guidelines restricting flexibility to move securities from the Held-to-Maturity (HTM) portfolio. A 5% cap on HTM sales further limits profit-taking opportunities while daily mark-to-market requirements deter aggressive duration bets amid uncertain rates. “Combined with elevated state borrowing volumes, this has widened spreads between short-term rates and 10-year G-Secs,” Reddy stated.
Supply-Demand Dynamics
Venkatakrishnan Srinivasan of Rockfort Fincap LLP observed that structural forces override monetary easing. “Despite RBI’s 100 bps rate cuts, yields are pressured by persistent federal/state bond supply, FPI outflows, and elevated global term premiums,” he said. The 10-year G-Sec spread over the repo rate has ballooned to 104 bps from 25 bps pre-June 2025 policy—reflecting an 80 bps surge in term premium.
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Published on November 21, 2025
