Indian banks are once again asking the Reserve Bank of India (RBI) for regulatory relief on losses arising from their investment portfolios. Lenders want permission to spread their mark-to-market (MTM) losses across the remaining three quarters of the financial year, instead of absorbing the entire impact in the quarter in which the losses were recorded.

The request comes after a period of sharp volatility in the government bond market, triggered in part by the West Asia crisis. The yield on India’s 10-year government security climbed to 7.13% in early April at the height of the market stress before easing to around 6.76%. Since bond prices and yields move in opposite directions, the rise in yields reduced the market value of bonds held by banks, resulting in MTM losses.

The issue has already begun showing up in banks’ treasury earnings.

ICICI Bank reported an 87% decline in treasury gains in the first quarter to ₹151 crore, while HDFC Bank’s net trading and MTM income fell 96% to ₹400 crore. Banks are now seeking more time to absorb the impact rather than taking the full hit upfront.

The request is also being discussed at an industry level. According to a bank executive aware of the developments, some lenders have already raised the issue individually with the RBI, while a formal representation through an industry association is being discussed. Banks have also apprised the government of their concerns.

So what exactly is an MTM loss?

For banks, the problem begins with the bonds sitting on their investment books.

When a bank holds a government bond, its value in the market can change even if the bank has no intention of selling it. If bond yields rise, bond prices generally fall. That means the market value of securities already held by the bank can decline, creating a mark-to-market, or MTM, loss when those investments are valued at current market prices.

This is where the recent movement in government bond yields matters. The rise in yields put pressure on banks’ treasury portfolios and weakened treasury income across the sector. ETBFSI data showed treasury income of scheduled commercial banks falling to 0.02% of assets in Q4FY26 from 0.04% in the previous quarter.

But there is an important distinction here.

An MTM loss does not necessarily mean that the bank has actually sold the bond and lost that money in cash. The loss reflects the change in the security’s current market value. If yields subsequently fall, bond prices can recover, reducing or even reversing the valuation loss.

That is precisely why the issue has become contentious.

Banks are dealing with a real decline in the reported value of their investments, but the eventual economic outcome can depend on what happens to bond yields and whether those securities are ultimately sold or held to maturity.

And that brings us to the next question: how much has this actually hurt the banks’ earnings?

The Hit Is Already Showing Up In Bank Earnings

The impact is not confined to the valuation of securities sitting on banks’ books. It is already visible in their treasury earnings.

Treasury income is only one part of a bank’s overall earnings, and the decline does not by itself indicate that the banks’ core lending businesses have deteriorated. But it does show the pressure that the movement in bond yields has put on a part of their balance sheets.

And this is where the current request to the RBI becomes important. Banks are not asking the regulator to erase the losses. They want the impact to be distributed across the remaining three quarters, rather than being concentrated in the quarter in which the market movement occurred.

That request, however, is not entirely new.

Earlier this year, banks had sought similar relief from the RBI. The regulator had said no.

RBI Has Rejected This Request Before

In April, the central bank rejected a similar request from lenders, who had sought relief from the impact of rising government bond yields and losses linked to foreign-exchange positions. The RBI’s position was that the performance of one financial year should not be carried over into another through deferred recognition of the losses.

The request came after the March quarter saw a sharp rise in bond yields. The benchmark 10-year government security yield rose by about 45 basis points to 7.03%, while the rupee also weakened sharply against the dollar. Banks argued that the combination had put unusual pressure on their treasury portfolios.

There is also a precedent for the RBI allowing such relief. In 2018, the central bank permitted banks to spread MTM losses on securities held in their Available for Sale and Held for Trading portfolios over four quarters after a sharp rise in government bond yields.

The difference this time is important. The earlier 2018 relaxation was introduced at the beginning of the financial year, allowing banks to absorb the losses within that same year. In April 2026, however, the RBI did not want the March-quarter impact to spill into the new financial year.

Now, with banks back at the regulator’s door, the question is whether the RBI will reconsider its earlier position or once again insist that the losses be recognised when they occur.

But Banks Have A Case To Make Too

It would be easy to look at the request and conclude that banks simply want to avoid taking a hit to their quarterly numbers. But the argument from lenders is more complicated than that.

Banks are pointing to the circumstances in which these losses emerged. The sharp rise in government bond yields came during a period of intense market uncertainty linked to the West Asia crisis. At the same time, lenders were dealing with pressure from the RBI’s decision to cap net open foreign-exchange positions at $100 million and require banks to wind down positions in the non-deliverable forward market.

Banks had argued earlier that the combination of these developments had created an unusually concentrated hit to their treasury books.

There is another reason their argument cannot simply be dismissed.

A bank does not necessarily lose cash every time an investment portfolio records an MTM loss. If bond yields subsequently fall, bond prices can recover. In fact, the 10-year government bond yield has already eased from 7.13% in early April to around 6.76%, meaning some of the market pressure that produced the initial valuation losses has since moderated.

There is also precedent for the RBI providing banks with some breathing room. In 2018, after government bond yields rose sharply and bond prices fell, the central bank allowed banks to spread MTM provisions on securities held in their Available for Sale and Held for Trading portfolios over four quarters. The crucial difference was that the relaxation came at the beginning of the financial year, meaning the losses were still absorbed within that same year.

So the banks’ argument is not entirely without merit.

They are essentially saying that an exceptional bout of market volatility has produced an unusually large valuation shock, and that forcing the entire impact into one quarter could make their financial performance look worse than the underlying business actually is.

But this is also where the argument becomes uncomfortable. Because a loss can be temporary without being imaginary.

And if the RBI allows banks to distribute that loss over three quarters, the next question is unavoidable: does spreading the pain make the accounts more accurate, or simply make the pain less visible in any one quarter?

The Bigger Question Is What Happens To The Loss

This is where the banks’ request moves beyond a technical accounting issue.

If the RBI allows lenders to spread the MTM losses over the remaining three quarters, the underlying loss does not disappear. What changes is when it shows up in the banks’ financial statements.

That distinction matters because the market value of a bond can move again. In fact, government bond yields have already fallen from the levels reached during the March-quarter sell-off. Market participants have consequently expected some of the earlier treasury losses to reverse as bond prices recover.

But that cuts both ways.

If yields fall further, a bank could recover part of an MTM loss over time. If yields rise again, the pressure can return. In other words, the valuation may change, but the exposure to interest-rate movements remains.

This is also why the RBI’s earlier refusal matters. In April, the central bank rejected banks’ request to stagger the likely March-quarter MTM losses, requiring lenders to absorb the impact rather than carry it forward.

The regulator therefore faces a familiar problem again: should an unusual market shock be treated as something that deserves temporary accounting flexibility, or should banks’ results reflect the full impact of the market movement in the period in which it occurred?

And there is a larger issue hiding underneath that question.

How much does a bank’s profitability change when the market moves in its favour — and how quickly does that advantage disappear when the market turns?

The Treasury Business Is The Part Worth Watching

There is a bigger issue sitting underneath the argument over MTM losses: treasury income can materially influence a bank’s quarterly numbers, even though it is not the core business of lending money.

That becomes important when market conditions change.

When bond yields fall, bond prices rise and banks with sizeable portfolios of government securities can benefit from valuation gains. When yields move sharply higher, the same portfolios can move in the opposite direction. The banking sector’s experience over the past few quarters has shown exactly how quickly that can happen. Treasury income for scheduled commercial banks fell to 0.02% of assets in Q4FY26 from 0.04% in Q3FY26 as rising yields hit investment portfolios.

The scale of the recent reversal is also worth noting. Banks collectively reported around ₹30,000 crore in treasury losses in Q4FY26, according to bankers cited by The Financial Express. But as government bond yields subsequently declined, banks were expected to recover part of those losses through gains on their bond portfolios.

That is the peculiar nature of this business.

A bank can look stronger when the bond market is moving in its favour and suddenly see treasury income weaken when yields reverse. The underlying lending franchise may not have changed dramatically during the same period.

Which brings us to the uncomfortable question at the heart of the RBI’s decision.

When treasury gains help earnings, they are reflected in the numbers. When treasury losses arrive, should banks be allowed to spread them out simply because the market may eventually reverse?

That is no longer just a question about MTM accounting.

It is a question about how transparently a bank’s quarterly performance should reflect the market risks sitting on its balance sheet.

The RBI Now Has A Difficult Call To Make

The RBI is now being asked to reconsider a position it took only a few months ago.

In April, the central bank rejected banks’ request to stagger the MTM losses arising in the March quarter, requiring lenders to recognise the impact rather than carry it into the new financial year.

The circumstances behind the latest request are somewhat different. Banks are pointing to another bout of sharp market volatility, this time linked to the continuing West Asia crisis and the resulting movement in government bond yields. They want the regulator to allow the losses to be spread across the remaining three quarters of FY27.

For the RBI, however, this is not simply about helping banks get through a difficult quarter.

There is a basic regulatory principle involved: financial statements should reflect the financial position of a bank when they are prepared. If a market loss has occurred, allowing banks to distribute that loss across future quarters changes the timing of recognition.

At the same time, there is a legitimate argument that an extraordinary market event can create an unusually concentrated impact on otherwise sound banks. The question, therefore, is not whether the losses exist. It is whether the circumstances justify when those losses should appear in the accounts.

And this is where the story gets more interesting. Because if the RBI says yes, banks get a smoother earnings path. If it says no, the full volatility of the treasury book remains visible in quarterly results.

And that brings us to the uncomfortable question: are banks asking for genuine relief from an exceptional market shock, or simply asking to push today’s pain into tomorrow?

What The RBI Is Really Being Asked To Decide

At first glance, the request looks like a relatively narrow question about accounting treatment. But the RBI’s decision could determine how investors see bank performance during periods of sharp market volatility.

If the regulator allows the losses to be spread across three quarters, banks would get more time to absorb the impact. That could prevent a single quarter from carrying the full weight of a market shock, particularly when the underlying securities have not necessarily been sold and their valuations could change again.

But there is a cost to that flexibility.

Quarterly results are supposed to tell investors what happened during that particular period. Moving a loss forward means the numbers for the quarter in which the loss actually arose would no longer show its full impact. The subsequent quarters, meanwhile, would carry part of a loss that originated earlier.

That is precisely the concern behind the RBI’s earlier refusal to allow banks to defer their March-quarter treasury losses. The regulator had required lenders to recognise those losses rather than spread them into the new financial year.

The latest request therefore puts the RBI in a familiar but difficult position.

It can treat the current volatility as an exceptional event and give banks some room to absorb the damage. Or it can maintain the principle that market losses should remain visible in the period in which they occur.

And whichever way the RBI goes, there is a larger question for investors.

Are banks asking for a sensible cushion against an extraordinary market shock, or are they asking the regulator to make a bad quarter look a little less bad?

The Real Test Is What Happens When The Market Turns

There is one reason this debate deserves more attention than a dispute over when an accounting loss should be recognised.

Treasury gains and losses can move with the market, while a bank’s core lending business may remain relatively unchanged.

When bond yields fall, the value of existing bonds can rise and treasury income can get a boost. When yields rise, that same portfolio can become a drag on earnings. Recent data already shows the pressure: treasury income at scheduled commercial banks fell to 0.02% of assets in Q4FY26 from 0.04% in the previous quarter as higher yields hit investment portfolios.

The recent quarter offered another example of how sharply this can move. Banks faced significant treasury losses after the 10-year benchmark yield rose by around 45 basis points, with the bond-market shock compounded by the RBI’s restrictions on banks’ net open foreign-exchange positions.

So the issue is not that treasury income is somehow artificial. It is a legitimate part of banking. The issue is how much weight should be given to these market-linked gains and losses when judging a bank’s quarterly performance.

A strong treasury quarter can add to profits. A bad one can take a sizeable bite out of them. And if the market eventually reverses, some of that MTM pressure can reverse too. That is precisely why banks want the RBI to give them room.

But it is also why the regulator has to be careful.

Because if gains are allowed to improve earnings when markets are favourable, while losses are given more time to appear when markets turn hostile, the question is no longer simply about accounting treatment. It is about whether quarterly numbers are giving investors the clearest possible picture of the risks sitting inside a bank’s investment book.

And that is where the RBI’s decision becomes much bigger than these three quarters.

The Problem With Making Losses Disappear From A Quarter

The banks’ argument rests on a genuine point: an MTM loss can change as market conditions change. But that does not mean the loss is irrelevant when it is recorded.

The value of a bond portfolio is being reassessed against prevailing market prices. If yields rise, the value falls. If yields subsequently decline, part of that loss can reverse. That is precisely why the timing of recognition matters.

If banks are allowed to spread the current losses across three quarters, the first quarter would show a smaller hit than the market movement actually produced at that point. The subsequent quarters would then carry portions of a loss that originated earlier.

That may make the earnings trajectory look smoother. But smoother is not necessarily the same as more accurate.

This is particularly relevant because the bond market itself has already demonstrated how quickly conditions can change. The benchmark 10-year government bond yield, which had climbed to around 7.1% at the end of the March quarter, has since eased, with the yield around 6.76% in early August.

So banks could ultimately see some of the pressure reverse.

But investors looking at quarterly results are not judging what might happen several months later. They are looking at what happened during the quarter being reported.

And that is the uncomfortable part of the banks’ request.

If the loss is real enough to affect the value of the portfolio today, should the financial statements be allowed to hide part of that impact simply because the market might recover tomorrow?

The RBI rejected a similar request in April, when banks sought to defer their March-quarter treasury losses. Now the regulator has to decide whether this latest bout of volatility is exceptional enough to warrant a different answer.

The Last Bit, The Bigger Issue Is Whether Quarterly Profits Are Telling The Whole Story

The argument over MTM losses ultimately comes down to what investors are supposed to see in a bank’s quarterly results.

Treasury income can move sharply with changes in bond yields. When yields fall, banks can benefit from higher valuations on their bond holdings. When yields rise, those same holdings can drag on earnings. The recent volatility has once again exposed just how sensitive this part of banking can be.

That does not make treasury income less legitimate. Nor does an MTM loss mean that a bank has necessarily suffered an equivalent cash loss. But it does mean that the investment book carries a market risk that can materially affect reported earnings.

And that is why the RBI’s decision matters beyond this particular quarter.

The regulator has already shown that it is uncomfortable with allowing banks to shift treasury losses between financial periods. In April, it rejected the industry’s request to spread the March-quarter losses, requiring banks to recognise the impact in their FY26 results.

The latest request is different in timing, but not in principle. Banks are once again asking for the impact of a sharp market movement to be distributed over several quarters.

The question, therefore, is no longer simply whether the losses are temporary or whether bond yields could eventually reverse. It is whether investors should see the full impact of a market shock when it happens, or whether banks should be allowed to smooth that impact over time.

And that brings us right back to the question at the centre of this story: Are banks seeking genuine relief from an exceptional market shock or are they simply asking to push today’s pain into tomorrow?