Rate sensitivity on the rise in PSB portfolios
interest rate sensitivity of a major trading portfolio for state-owned public sector banks and foreign banks increased from September 2023 to March this year, implying greater exposure to the impact that volatility in bond yields can have on profits and capital.
«The AFS (available for sale) portfolio's sensitivity (PV01) increased for PSBs (public sector banks) and FBs (foreign banks) since September 2023, while it declined for PVBs (private banks),» the Reserve Bank of India (RBI) said in its June 2024 Financial Stability Report.
«PV01 increased for PSBs owing to a rise in duration, despite their AFS portfolio shrinking. For FBs, the reverse occurred as their portfolio size increased and their duration declined,» the RBI said.
The PV01 refers to a measure of sensitivity of the absolute value of a bank's investment portfolio to a change of one basis point in the interest rate.
Market value of investments subject to fair value of banks taken under assessment by the RBI was ₹22.4 lakh crore in March. Of this, 89.3% was categorised as AFS.
A large portion of banks' investments in the AFS portfolio is made up of government bonds as Indian lenders are statutorily required to hold sovereign debt as part of a regulatory reserve requirement. Bond prices and yields move inversely. When bond yields fall, banks stand to make trading gains and strengthen their capital position, while an increase in yields leads to marked-to-market losses, which require banks to set aside provisions.
The RBI noted that government bond
