The Hindu Business Line : Indian holdings of US gilts down to $12.9 b

INDIAN institutions and the Reserve Bank of India have reduced their holdings of US Treasury bonds by $600 million in December 2004 in anticipation of hikes in Federal interest rates.

According to data released by the US Treasury Department, Indian holdings of US treasuries have come down to $12.9 billion. The year-on-year dip, from December 2004 to December 2003, was $3.8 billion. The holdings are still higher than the December 2002 level of $9.2 billion.

Other institutions holding foreign government securities include the General Insurance Corporation of India and foreign branches/subsidiaries of domestic public sector banks. The RBI has invested some of its foreign exchange reserves in US treasuries.

No slowdown in inflows: Bankers said that the reduction in the holdings did not reflect any slowdown in inflows to the country. The inflows averaged at least $100 - 150 million per day, the bulk of it being portfolio flows from foreign institutional investors, overseas corporate bodies and non-resident Indians.

Current account receipts have slowed ahead of the Budget for 2005-06, as exporters have preferred to delay their inward remittances. But demand for foreign currency has increased in view of the uptick in oil prices. As a result, the foreign exchange reserves in December '04 was about $130 billion; it has since then dropped to slightly below $129 billion despite the dollar's weakening.

Dispersed holdings: Bankers said that the holdings were being allocated in other government securities as part of the treasury management. The holdings were dispersed over other government securities including the euro denominated securities and pound sterling securities. Besides US government securities, the RBI has also invested in treasury bills and bank deposits.

Since April, the Federal Reserve Board has hiked the Fed funds rate (the overnight borrowing rates between US banks) by at least 100 basis points. All these hikes were done on a graded basis of 25 basis points each time.

Aggressive investors: However, despite these hikes there has been very little movement in the 10-year yield of US treasuries, partly due to purchases by countries such as China and Japan. Both these countries have aggressively invested in US Government securities and have rarely divested which has ensured that US treasury 10-year yields remained at 4.65 levels, almost the same level as in December 2003. But the Fed has indicated that further hikes in the offing.

Indian institutions have preferred to play safe and protect themselves against any risk of investment depreciation. Consequently, bankers said that with the anticipation of further hikes in the Federal interest rates, shifts had taken place.

The shifts were evident from the US treasury data of liabilities to Indian banks and institution. These liabilities that included bank deposits, certificates of deposits and US treasuries increased from $10.533 billion to $11.270 billion between April '04 and December '04 this fiscal year. This kind of treasury operations, bankers said, allowed the RBI to better manage the exchange reserves and also reduce the costs of sterilisation operations.

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