Banking stocks emerged as top laggards in August, with the Nifty Bank shedding another 4.12% to record its worst monthly performance since January 2024, taking its cumulative two-month decline to nearly 6.4%.
Selling was broad-based, as 10 out of the 12 index constituents ended the month in the red. The steepest fall was seen in IndusInd Bank, which dropped 7.4%, followed by Federal Bank, ICICI Bank, Canara Bank, Punjab National Bank, and HDFC Bank, which lost between 5% and 7%.
The underperformance of banking heavyweights also dragged down the benchmark indices, sending Nifty 50 and Sensex lower by 1.3% and 1.8%, respectively, in August.
Falling bond prices ignite worries over treasury income
The bleed in domestic-focused stocks was largely driven by weakness in the bond market, as prices in recent weeks have worsened, leading to a spike in yields since both move in opposite directions.
The yield on the Indian 10-year G-Sec rose toward 6.6% in August, its highest level since March 27, as fiscal worries and muted demand weighed on sentiment. The yield ended the month 21 basis points higher, marking its biggest monthly jump since September 2022, raising concerns that hardening yields could hurt banks’ treasury income in the second quarter of the current fiscal year.
This is significant as treasury income had emerged as a strong earnings lever for banks in the June quarter amid the ongoing NII crunch, aided by a sharp moderation in policy rates, RBI’s OMOs, and supportive liquidity conditions.
Between December 2024 and June 2025, the 10-year G-Sec yield had corrected from 6.8% to 6.3%, enabling healthy gains for the banking system.
However, despite the RBI cutting the repo rate cumulatively by 50 basis points since June 1, yields have risen by 40 basis points, signaling that the bond market is worried about a potential widening of the fiscal deficit following the government’s proposal of GST rate cuts across key categories.
In addition, the government is reportedly preparing a supportive package—similar to the Covid-19 relief measures—to support labour-intensive sectors amid higher US tariffs. Bond investors fear this could further impact government revenues.
The latest data released by the Controller General of Accounts (CGA) shows that the fiscal deficit for the first four months of FY26 has increased to 29.9% of the full-year target at the end of July.
According to the domestic brokerage firm, JM Financial, any fiscal hit due to the rate rationalisation in GST will exert pressure on the fiscal position in the range of 0.15% to 0.3% of GDP. Moreover, a lower nominal GDP due to a lower deflator could optically stretch the fiscal deficit target.
Besides, rising yields also indicate that investors are not expecting further rate cuts from the RBI, especially as the governor has already signalled very limited room for easing, with the stance moving from ‘Accommodative’ to ‘Neutral’. Markets expect the yield to remain in the 6.52%–6.65% band this week, with focus shifting upcoming Goods and Services Tax Council meeting.
PSU banks outperform
Private banks under Motilal Oswal’s coverage reported total treasury gains of ₹59.7 billion in 1QFY26, a sharp rise from ₹17.5 billion in the preceding March quarter. Public sector banks posted aggregate treasury gains of ₹132.3 billion versus ₹115.9 billion in 4QFY25, up 14% QoQ.
The share of treasury gains in total other income has thus increased to 22–40% for PSBs and 5–30% for private banks, representing 24% and 10% of PBT for PSBs and private banks.
The brokerage further noted that the mix of treasury gains in total other income is now at its highest in four years. Among PSU banks, SBI, BoB, and Canara Bank reported the largest treasury gains, contributing 31–40% of their total other income.
Among private banks, HDFC Bank and ICICI Bank posted healthy treasury gains, accounting for 5–15% of total other income in 1QFY26.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
