The Reserve Bank of India has allowed banks to spread their bond trading losses, a change that is likely to boost profitability of lenders as well as spur a rally in stock and bond markets. Under the change, lenders can spread bond-trading losses incurred in the December 2017 and March 2018 quarters equally over up to four quarters will come as a major reprieve to India's state-run banks, which have been hard hit by trading losses from a spike in bond yields over recent months.
State-run banks, which are struggling under a burden of provisioning for record levels of bad loans, have been further hit by mark-to-market losses on their huge bond holdings due to a sustained spike in bond yields since July.
Last month, Credit Suisse warned that India's state-run banks could lose more than 200 billion rupees ($3.1 billion) in the January-March quarter, due to a continued spike in bond yields and as they held more bonds than are required by the regulator. Indian bond yields rose by 67 basis points in the October-December quarter, their steepest since a currency crisis in September quarter of 2013 pushing banks to provide capital for massive mark to market losses and in turn leading state banks, the largest set of bond investors to stay away from buying.
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