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“Declining G-sec yields to aid treasury performance – to benefit PSU banks”

ICICIdirect Research 26 Jun 2026 DISCLAIMER

Sharp retracement of key commodity prices, reduces one of the key major macro overhangs such inflation, fiscal deficit, interest rate hikes and consequently bond yields for the banking sector.
The benchmark 10-year G-Sec yield has softened by ~20–25 bps to 6.77% (vs 7.01% as of 31st March 2026), supported by stabilizing geopolitical tensions and improving confidence in the macro environment. This decline is expected to result in treasury gains for banks, with PSU banks likely to be the primary beneficiaries, potentially adding ~4–5% (annualised) to FY27 earnings.

Amount in ₹ crore

Investments (Q4FY26)

AFS

Duration (yrs)

Impact on PAT

Bank of Baroda

3,88,644

58,987

2.57

1.9%

Union Bank of India

3,31,682

52,961

4.06

2.8%

Punjab National Bank

4,88,441

1,12,688

3.23

4.9%

Canara Bank

4,05,528

61,413

5.1

4.0%

Indian Bank

2,42,486

61,738

3.25

4.3%

Bank of India

2,54,703

29,579

2.45

1.8%

Bank of Maharashtra

1,02,207

41,606

3.89

5.8%

UCO Bank

99,295

20,526

3.45

6.4%

Source: Company, ICICI Direct Research

Factors contributing to decline in yields include 1) Substantial inflows of foreign capital in government bonds amid anticipated inclusion of Indian bonds in global bond indices, 2) stabilising geopolitical conditions paring down inflation expectations resulting in cooling-off of domestic yields, and 3) declining global bond yields.
With 10-year G-Sec historically trading at a spread of ~80-125 bps over the repo rate (implying a yield of roughly ~6–6.5%), we believe there remains scope for further moderation in yields. Such moderating resulting in treasury gains is seen as tailwind for PSU banks which have been delivering strong fundamental performance backed by recovery in credit growth, stable liabilities franchise and benign asset quality concerns. Considering decline of 25 bps in G-sec yield, PSU banks are poised to witness 4-5% impact on annual earnings with Central Bank of India being an outlier.

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