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Thursday, Jun 17, 2004

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Money & Banking - Govt Bonds

India's holdings of US Govt papers hit $14.6 b

C. Shivkumar

Bangalore , June 16

INDIAN institutions and the Reserve Bank of India purchased $2.3 billion worth of US government securities in April in view of the surging foreign exchange reserves.

According to data released by the US Treasury, India's holdings of US government securities were worth $14.6 billion in April this year. This was the highest since December 2003, when holdings were worth $15.5 billion. Among the major investors in US government securities, besides the RBI, are General Insurance Corporation of India, which has global reinsurance operations and foreign branches/subsidiaries of domestic banks, also has a major exposure.

The sources said that the investments into the government securities were on account of the large accretions of foreign exchange reserves. Reserves during between March and April this year went up from $109 billion to $117 billion. The bulk of the investments in foreign government securities by the RBI were at the short end, the banking sources said. This implied that most of the securities were in the form of treasury bills. The preference for treasury bills was particularly on account of the high liquidity and the possibility of an increase in US interest rates.

Expectations are that the increase in the Federal funds would be announced after the June 20 Federal Open Market Committee meeting. The Fed fund rate is rates at which US banks and institutions lend overnight funds to each other. Such expectations reflected in the high yields on long-term securities. Presently the ten-year U S Treasury yield is about 4.90 per cent, at least 1.5 per cent above its last level during the corresponding period of last year.

As a result of this possibility, sources said, only a small portion of the exchange reserves were parked in US treasuries. Large volumes of the reserves were also parked with multilateral institutions, including the Bank for International Settlements and the European Central Bank.

But sources said that accretions were also being invested in the euro and sterling-denominated securities. Yields on sterling and euro-denominated securities are slightly higher than dollar-denominated securities.

Yield on one-year UK treasury is currently about 4.61 per cent, about 10 basis points more than gilts in the domestic markets. Similarly, 10-year sterling yields are also close to domestic gilt yields.

This preference for euro and sterling-denominated investments was evident from the reduction in US bank liabilities to Indian institutions. The balances that include deposits made by Indian corporates, correspondent accounts by Indian banks in international banks, were $10.5 billion in April this year, down from $11.3 billion in March.

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