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Informist, Monday, Feb. 16, 2026

 

By Pratiksha and Aaryan Khanna

 

MUMBAI – Banks were able to make a large profit by trimming their investment books in 2025 but the next one to two years will likely be characterised by a focus on buying and holding bonds in portfolios, according to Sushanta Kumar Mohanty, chief general manager in charge of treasury and global markets at Bank of Baroda. As long as the Reserve Bank of India maintains easy liquidity conditions in the banking system, which is his base assumption, gilt yields are also not likely to rise further, he said.

 

"In the current interest-rate environment, a buy-and-hold approach is likely to dominate for the next one to two years, with opportunities to book gains arising later," Mohanty said in an interview with Informist last week. "Over a three- to five-year horizon, returns will largely come from interest income rather than trading gains."

 

Mohanty does not see the yield on the 10-year government bond rising to over 6.75% in the near term, backed by firm investor demand. The 10-year gilt was at 6.67% at 1630 IST Monday after rising to a 12-month high of 6.78% earlier in the month. While he did not indicate a preference, the treasury head said 10-year state bonds were "a good buy" at the current level of 7.60%. The current spreads between the repo rate and gilts as well as state government securities were attractive, which are likely to lead to an accretion of these statutory liquidity ratio-eligible bonds in banks' portfolios, he said.

The banker oversees a global investment portfolio of INR 3.60 trillion as of Dec. 31 in India's third-largest state-owned bank by deposits. He remains sanguine on the demand-supply dynamics in the bond market heading into 2026-27 (Apr-Mar). Bank of Baroda's SLR ratio fell to 21.70% of net demand and time liabilities as of Dec. 31 from 26.20% a year ago, though it remained well above the regulatory minimum of 18.00%. This was in line with peers in a year when the RBI bought a record INR 7-trillion worth of bonds.

 

Bank of Baroda's decision to split its primary dealership operations is also likely to benefit the bank on a consolidated basis, Mohanty said. Though the treasury head did not give a specific timeline on when such a split would happen, he said there would only be an insignificant impact on the standalone treasury portfolio. The state-owned lender has received RBI approval to transfer its primary dealer license to a wholly-owned subsidiary and its board has approved investing INR 20 billion into the entity as capital. In the nine months ended December, the state-owned bank's treasury income more than doubled to INR 43.91 billion.

 

Speaking on the foreign exchange front, Mohanty was not immediately rosy about the rupee's prospects. On Feb. 2, India and the US announced a trade deal, under which tariff on Indian goods exports to the US were lowered to 18% from 50%. Following this announcement, the rupee logged its best day in over seven years on Feb. 3.

 

"We will have to see how the trade deal will transmit to the last mile for those who are undertaking export business with the US," the Bank of Baroda treasury head said. "It is something we will see over time."

 

He added that while some foreign portfolio inflows have occurred following the trade deal announcement, investors are currently cautious and waiting for greater clarity. Moreover, much will depend on the geopolitical situation, he said. So far in February, foreign portfolio investors have infused almost $2.69 billion into Indian markets on a net basis. This is after pulling out around $2.41 billion on a net basis last month.

 

Following is an edited transcript of his comments in a wide-ranging interview on portfolio management and what direction the banking industry may take in the near future:

 

Q. Three events have just passed by: the FY27 Budget, the Monetary Policy Committee's decision, and the India-US trade deal. What has been your broader take away from the three of them and what has changed for the markets in general for you?

A. The Budget was almost as per expectations. So, there was minimal impact on the market, both on the equity and the interest rate side. The trade deal was a significant event and that has had an impact on the exchange rate with the rupee strengthening by almost INR 2.0-2.5 per dollar.

 

Otherwise, the markets are stable and the way the RBI has provided liquidity to the market, things are very comfortable now.

 

Q. On the gilt side, you mean to say the 6.80% level on the 10-year yield is what you are seeing as the top yield level?

A. The current level of 6.75% should stay for some time. I do not think yields are going up now, because if you see the spread between the repo rate versus 10-year g-sec and SGS (state government securities), it is quite high. And if you compare again the 10-year g-sec versus SGS, there again the spread is quite good. The last auction witnessed strong demand even though the amount had increased substantially.

 

Q. Is there a preference of SGS versus g-sec for your SLR accretion, considering the SLR percentage has come down? Is spread the only consideration or do you consider liquidity too?

A. Every bank has its own risk appetite framework. It is not an either-or situation between SGS and G-sec. There will be market demand for SGS or G-secs based on relative value.

 

But certainly SGS is a good buy. At roughly a 5.25% funding cost versus around 7.60% yield (on a 10-year state bond), SGSs offer a spread of over 230 basis points; even funding a 10-year SGS through repo can yield about a 2.5% spread, making it an attractive option.

 

Q. Do you expect to be able to make trading gains in 2026, or do you think a carry-oriented strategy is more suitable following the MPC and the expectation of easy liquidity?

A. In the current interest-rate environment, a buy-and-hold approach is likely to dominate for the next one to two years, with opportunities to book gains arising later. Over a three- to five-year horizon, returns will largely come from interest income rather than trading gains.

 

While 2025 offered scope for profits from selling investments, the next couple of years may again favour income-led strategies. That's how the cycle goes.

 

In the near term, the repo rate is expected to remain stable, unless inflation surprises on the upside. If rates stay unchanged, the arbitrage between funding costs and yields should persist, supporting continued investor interest in gilts and SGS.

 

Q. What impact will the strong growth in credit have on your investment portfolio? There is typically a slight slack in the June quarter. Are you waiting for that to replenish your books?

A. Credit growth and investment activity aren't interdependent. Banks don't necessarily need to sell investments to generate cash for loans. There is now a well-developed corporate bond repo market as well; margins may vary, but liquidity is generally available. If value exists, both lending and investing can proceed simultaneously.

 

Q. And you expect liquidity to continue to be in excess or surplus for the near term?

A. That is the guidance from the regulator. The general belief in the market is that liquidity is expected to remain adequate.

 

Q. To close out the fixed income part – you intend to streamline your PD operations into a separate entity. Can you tell us more about that?

A. The PD desk currently sits within the bank treasury. To fully leverage the PD licence and to unlock value, the bank plans to spin it off into a fully owned, well-capitalised subsidiary.

 

Unlike 2007 when many bank PD subsidiaries had come back into banks, markets have developed a lot and facilities introduced by the RBI make having a standalone PD structure an attractive proposition.

 

Q. But is there going to be an impact on the bank's treasury income because of it?

A. No, not at all. Since the PD will be a subsidiary, its earnings will ultimately add to the bank's overall income. As a standalone entity, it will have a dedicated setup with dealers and back-office support. This structure is expected to enhance efficiency and contribute positively to the bank's profitability.

 

Q. On a consolidated basis, yes, but even on a standalone basis?

A. Even on a standalone basis, the impact will be insignificant. The current PD desk is comparable to a single dealer handling the held-for-trading portfolio.

 

Q. As you said, the RBI has given a lot of facilities to PDs. One of them is foreign exchange operations. Do you see the PD eventually offering such operations to clients?

A. It will be very premature to talk about that now. The immediate priority is to establish the PD business and gain stability.

 

Q. Do you think that apart from the reaction that we have seen so far for the rupee from the US trade deal announcement, there are concerns as well, considering the intricacies of it? There is a clause of $500 billion of US imports.

A. We will have to see how the trade deal will transmit to the last mile for those who are undertaking export business with the US. It is something we will see over time.

 

Q. RBI has been using FX swaps actively as a liquidity measure of late. It used to be few and far between in the past. How do you think that structurally changes things for the FX market?

A. There is ample liquidity in the market. The market has deepened significantly over the past 10–15 years and swaps of $5 billion–$20 billion are unlikely to cause any structural disruption.

 

Q. What is your sense on FPI activity in India post the US trade deal? Do you think we will see a sustainable return of FPI investment now?

A. Much will depend upon the geopolitical situation. Otherwise, the situation is quite conducive here in India. While some inflows have occurred, investors are currently cautious and waiting for greater clarity.

 

Q. There's been a lot of discussion about maybe a relaxation in how Liquidity Coverage Ratio is computed. The new LCR norms are also going to come into effect on Apr. 1. Do you feel that there's any argument to be made on loosening of the LCR norm including maybe some part of Cash Reserve Ratio being used for LCR?

A. We haven't faced any issues so far. Nor has there been any industry push for relaxation.

 

Q. What impact are you seeing from the new LCR norms?

A. There would be some impact, but overall it is expected to be largely positive.

 

Q. But are you expecting that the RBI will buy bonds in FY27 as well more directly?

A. It's not necessary as of now. But RBI is always there in the market to act if required and has consistently stepped in when needed.

 

Q. Lastly, is there some aspect that you feel that market people are not really factoring in or pricing in, where you think that there's going to be maybe a surprise for the market – either positive or negative - in the near term?

A. One factor could be deposits. Going forward, banks may need to diversify funding sources beyond deposits -- similar to global practices -- through bonds or external commercial borrowings. These things will evolve.  End

 

US$1 = INR 90.65

 

Edited by Ashish Shirke

 

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