Bond yields have escalated sharply in Q2FY27, with the benchmark 10-year government bond yield rising 42 basis points during the quarter to 7.17%, as reported by Business Standard. The five-year bond yield rose by 43 basis points to 6.85%, while the seven-year and 15-year bonds increased by 50 and 40 basis points respectively. The 10-year yield closed at 7.17% on September 30, after rising 22 basis points in September alone - its highest level since April 2024. This represents a significant reversal from the 32 basis points decline in Q1FY27, with the rise more than offsetting the previous quarter's gains.
The yield hardening was driven by multiple global and domestic factors, according to Business Standard reports. Global bonds closed out September with their worst month in years, with the US 10-year Treasury yield rising to 5.34% - its highest level since 2002. Brent crude climbed back above $100 per barrel, having fallen to pre-Iran-US war levels in the first quarter, reviving concerns over imported inflation. Persistent selling by foreign portfolio investors in debt and equity and the depreciation of the rupee added pressure, with India's forex reserves falling by a record $18.3 billion in the week ended September 25. The RBI's depletion of dollar reserves in the foreign exchange market also contributed to market volatility.
While Maharashtra and Karnataka have declared drought in about three-fourths of their respective talukas for the 2026 kharif crop season, according to reports, the real challenge for PSU banks lies in their bond portfolios rather than potential loan waivers. As bond yields move up, bond prices fall, leading to mark-to-market losses on the portfolio. The 10-year yield crossed 7% on September 11, driven by the surge in crude oil prices, global bond sell-off and expectations of a rate hike by the RBI's Monetary Policy Committee. A treasury head at a private bank noted that "the rise in yields should lead to mark-to-market losses for the banks" and that lenders with larger available-for-sale (AFS) portfolios will feel the impact more.
PSU banks maintain greater exposure to agricultural loans than their private-sector counterparts, making them more vulnerable to loan waiver impacts. In FY26, the agriculture sector accounted for 10% of State Bank of India's (SBI) domestic loan book, compared to around 4% for the country's largest private-sector lender HDFC Bank (excluding agriculture-related trading activities). Similar trends are observed at the second-largest PSU and private-sector banks, Punjab National Bank and ICICI Bank, respectively. However, historical precedent suggests loan waivers may not significantly impact banks' earnings, as the government compensated all banks during the ₹52,500 crore farm loan waiver in 2008.
SBI incurred a treasury loss of ₹1,471 crore in the March quarter (Q4FY26) as bond yields rose 44 basis points during the quarter to 7.03%. After reporting a treasury gain of ₹4,319 crore in Q1FY27 as bond yields softened, the bank could again see treasury losses in Q2FY27. Treasury gains accounted for nearly 20% of SBI's net profit in both FY26 and Q1FY27, while treasury gains contributed just 2% of HDFC Bank's standalone profit in Q1FY27 and 6% in FY26. The yield gap between India's benchmark 10-year and US 10-year government bonds has narrowed from 257 bps at the start of 2026 to 193 bps now. With the 10-year yield rising to 7.21% on Thursday, ahead of the RBI's policy decision on October 7, pressure on bond portfolios is expected to continue in the third quarter.
