Summary:
PSU bank stocks face treasury pressure as India’s 10-year government bond yield rises above 7%. Higher yields can weaken bond valuations and treasury gains, while drought-related agricultural credit concerns add another risk for public sector banks ahead of Q2 FY27.
Public sector banks are facing a fresh earnings risk as rising government bond yields threaten treasury income and the value of their investment portfolios. India’s benchmark 10-year gilt yield ended September near 7.15%, sharply above ~6.72% at June-end, even as drought conditions in Maharashtra & Karnataka have revived concerns around farm-loan relief.
While agricultural loan waivers can affect credit discipline and cash flows, the more immediate financial pressure for banks could come from the sharp correction in government bonds, particularly for lenders that benefited significantly from treasury gains in recent quarters.
Bond Yields Rise, Treasury Gains Come Under Pressure
Bond prices and yields move in opposite directions. When yields ↑, existing bonds carrying lower coupons lose value. Banks holding sizeable government-security portfolios can therefore face mark-to-market pressure and weaker gains from bond sales.
India’s 10-year government bond yield was around 7.15% on September 30, compared with roughly 6.72% at June-end, an increase of more than 40 basis points during Q2FY27.
Global conditions have also turned less supportive. The US 10-year Treasury yield climbed above 5% during September amid elevated inflation concerns and uncertainty over the future path of interest rates.
The India-US 10-year yield spread consequently narrowed to around 195 bps, from about 272 bps in March 2026. Foreign portfolio investors withdrew a net ₹10,602 Cr from Indian government bonds under the Fully Accessible Route during September, the highest outflow in six months.
SBI’s Treasury Exposure Puts Focus on Q2FY27
State Bank of India provides an example of how treasury income can influence bank profitability.
The bank reported treasury gains of about ₹4,319 Cr in Q1FY27, when bond-market conditions were relatively supportive. Treasury income represented a meaningful share of quarterly profitability.
The changed yield environment during July-September means Q2FY27 could look different. A rise in yields can reduce realised gains from bond sales and create valuation pressure across securities held in portfolios where mark-to-market rules apply.
The issue is particularly relevant for PSU banks because treasury operations have historically formed a larger and more volatile component of earnings than for some large private-sector lenders.
At the same time, banks remain major buyers of high-quality debt. SBI recently purchased nearly ₹5,000 Cr, or ~40%, of Reliance Industries’ ₹13,000 Cr 10-year bond issue carrying a 7.90% coupon.
Drought Revives Farm Loan Concerns
The second risk comes from agriculture. Maharashtra has declared drought in 265 of 358 talukas, or about 75% of the state, after deficient rainfall during the 2026 kharif season. Karnataka has also faced a severe rainfall deficit and announced immediate support for drought-affected farmers.
PSU banks generally have higher agricultural exposure than large private lenders. In FY26, agricultural loans accounted for roughly 10% of SBI’s domestic loan book, compared with around 4% for HDFC Bank.
However, a government-funded waiver does not automatically translate into an equivalent loss for banks. Under the nationwide 2008 Agricultural Debt Waiver & Debt Relief Scheme, the government ultimately reimbursed lending institutions more than ₹52,400 Cr.
Similarly, Uttar Pradesh’s 2017 farm relief programme involved assistance of more than ₹36,000 Cr.
What Investors Should Track
The two risks affect banks differently. Farm waivers can weaken repayment behaviour, delay recoveries and increase uncertainty around agricultural credit, but government reimbursement can limit the direct earnings hit.
Rising bond yields, however, affect investment portfolios much more immediately. With domestic yields above 7%, US yields above 5% and foreign investors reducing exposure to Indian government debt, treasury performance is emerging as an important variable for PSU banks heading into Q2FY27 results.
For investors, movements in the 10-year gilt yield, treasury gains, mark-to-market impact and agricultural asset quality will therefore be important numbers to monitor in the coming quarters.
