The Hindu Business Line : For intervention in domestic forex market

INDIAN institutions and the Reserve Bank of India sold $1 billion (Rs 4,600 crore) worth of US Government securities in July for intervention in the domestic foreign exchange markets.

According to the data released by the US Treasury Department, the sales resulted in depletion of the holdings of US Government securities to $14.9 billion in July, down from $15.9 billion in June. But this was still at least $3.6 billion more than the corresponding period of the previous year.

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.

During the same period, Indian institutions, including the RBI, have also drawn on the cash balances for intervention in the markets.

This was evident from the drop in US banking liabilities to Indian entities to $10.244 billion in July, down from $10.635 billion. This figure was still up from the corresponding period of the previous year, when the balances were $8.351 billion.

Banking sources said that the drawdown of the balances and the sale of securities were mostly to meet the demand for foreign exchange from oil companies.

During this period, foreign exchange reserves have dropped consistently. From a peak of over $121.106 billion on July 16, foreign exchange reserves dropped $2.78 billion to $118.319 billion as on July 30.

Only a part of the reserves are kept in US Government dated securities. The bulk of it is deployed in short-term treasury bills.

China, on the other hand, has a large holding of dated securities. The difference is partly driven by the need for liquidity. Treasury bills are far more liquid than dated securities.

Bankers said that these sales resulted in RBI making large treasury profits in July. However, the quantum of profits made is not known, though estimates are that in the sales of securities, the RBI and the insurance companies skilfully rode the yield curve.

Yields on ten-year US securities dropped to 4.44 per cent in July. Most of the securities were purchased in June on the eve of the first round of the 25 basis points (0.25 per cent) Fed funds rate hike.

Traders said that some of the securities that the RBI and Indian institutions had purchased were at high yields, when 10-year yields were close to about 4.75 per cent allowing the RBI to make profits from the exit in July.

But more such sales have taken place in August, traders said. This was when the yields on 10-year US securities yields had moved close to 4.15 per cent.

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