The Hindu Business Line : Steady investments by RBI, institutions — US treasury holdings at record $18.4 b in March

THE holdings by Indian institutions and the Reserve Bank of India of US treasury securities jumped to a record $18.4 billion in March, the highest since July last year, driven by bulging foreign exchange reserves.

According to data released by the US Treasury department, the holdings have steadily increased since January and February this year.

The increase in holdings of US treasuries since the beginning of this calendar year was $2.5 billion.

In July last, Indian institutions holdings of US treasuries were worth $17.2 billion and in January it was $15.9 billion. 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. Among the factors that propelled the increase in US treasury holdings was the accumulation of foreign exchange reserves. India's foreign exchange reserves are currently about $142 billion, an increase of $22 billion on a year-on-year basis. In fact, the current increase in holdings, bankers said, marked a shift in the pattern of parking of foreign exchange reserves.

Since last year India had shifted to euro and pound sterling-denominated securities in a bid to diversify its holdings to limit potential losses due to depreciation. Such risks arose on account of the periodic increases in US Federal Fund rates (the rate at which US banks borrow overnight funds from each other).

But, bankers said that Indian institutions had begun shifting back to dollar holdings, in a bid to cut potential losses due to exchange rate volatility.

The reversal towards US treasuries by Indian institutions was despite most non-Asian countries restricting their holdings of US treasuries. However, bankers said that the dollar's appreciation in February , both against the euro and the pound sterling, had triggered some losses. This prompted shifting back to US treasuries, they added.

But, bankers said that Indian holdings were still of short tenors, unlike other Asian countries such as Japan or China, who are the world's largest creditors to the US government.

The bulk of the holdings of both Japan and China were for tenors of over 10 years. These central banks, the bankers said, continued with the purchase of long-dated securities. In fact, this was one of the major factors that prevented the yields for long-dated US treasuries from rising.

Despite the US Fed hiking the rate to 3 per cent, through eight graded increases during the year, the 10-year US treasury yields have softened to 4.1 per cent as against 5 per cent a year ago, driven entirely by purchases by Chinese and Japanese central banks, bankers said.

Indian institutions' preference for short tenor securities, on the other hand, was driven by caution, and possibly to avert losses in the event of steep depreciation, the bankers added.

Consequently, incremental holdings were mostly in the form of highly liquid treasury bills and bank deposits.

Treasury bill holdings between July 2004 and March 2005 increased by about $4.5 billion and US banking liabilities to Indian institutions by another $4 billion, according to the data.

Since January, holdings of US treasuries have increased by exactly $2.5 billion, implying that most US securities accumulated were short term in nature. The bankers said this strategy would likely continue if the surge in forex reserves continues.

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