Impact to bank's bottomlines due to fluctuating bond yields

Bond yields have an impact on prices of bonds- they share an inverse relationship. If yield rises, prices fall and vice-versa. Bond yields have an impact on Indian banks bottomlines because the banks have a substantial investment in govt. bonds necessitated by statutory liquidity that banks have to maintain per RBI guidelines.


Lets take an example of SBI in this case. The following calculation takes the standard g-sec (10 yr, 6.35% coupon). At 7.85% yield, this was available at Rs 89.895. 

Now if there was to be 10 bp increase in yield, it would mean yield to rise to 7.95% and resulting price as Rs. 89.2698. 

Given SBI domestic investments and proportion of that in SLR and AFS (Available for Sale), it comes to Rs. 60,732 crore. A Rs. 0.62 loss on Rs. 100 of bond value means Rs. 380 crore for SBI. 
Because every loss in AFS investments (made by mark to market provisions) have to be compensated, this would mean more money parked by SBI and less available money for credit. 


P.S: All figures above have been picked from Economic Times, April 1 edition.