The Hindu Business Line : Investment in US treasury securities jump to $19.5 b

Burgeoning deposits
Investments have increased to a record $19.5 billion in Feb.
Investments in US treasuries comprise 10 per cent of the forex reserves.

Bangalore April 21 Investments in US treasury securities by Indian financial institutions and the Reserve Bank of India jumped to a record to $19.5 billion in February this year, on the back of burgeoning foreign exchange reserves.

According to data released by the US Treasury Department, the increase over the corresponding period of the last financial year was $9.5 billion. Between January and February this year alone, investments rose by $3.7 billion.

Major Investors

Major financial institutions that are investors in US government securities, besides the RBI, include 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 $194.634 billion, an increase of $51.486 billion on a year-on-year basis.

Holdings of US treasuries as a percentage of gross foreign exchange reserves have also steadily increased. In February, investments in US treasuries comprised 10 per cent of the forex reserves. However, during the corresponding period of the last financial year investments comprised just 7 per cent of the forex reserves. This trend marked a reversal in the RBI's strategy of restricting investments in US treasuries, where yields are far from attractive.

Despite the reversal, most of the investments in US treasuries were short-term securities. The treasury data showed that about $13.344 billion were held in short term US treasury obligations. The bankers said, only the remaining was held in slightly longer-term securities, though the average maturity was unlikely to be in excess of one year.

Short-term capital

The increase in the component of the US treasury investments was also indicative of the nature of inward foreign exchange flows, the bankers said. The investments indicated that large volumes of the current forex accretions were driven by short-term capital flows.

In fact, this was one of the major factors that contributed to the accretions in the foreign exchange reserves. Since such capital was volatile, the bankers said, the preference was to invest the dollars, acquired through interventions in the open market in short-term securities. Besides, domestic financial institutions and foreign bank branches also preferred short-term securities.

Deficit

The bankers said the purpose of staying invested in short-term securities was entirely for liquidity. Further, it also cut the risks of depreciation losses, in the event of hikes in policy rates by the Federal Reserve Bank in future.

Yet, despite these strategies investments in short term, US treasuries incurred a deficit. For instance, the average yield on three month US Treasury bill in February 2007 was 5.08 per cent. During the same period, the RBI's reverse repurchase (Reverse Repo) rates were 6 per cent, implying a deficit.

However, bankers said, the bulk of the foreign exchange reserves were held in non-US treasury investments. These included in the form of cash balances with multilateral institutions, other central banks (Bank of England, European Central Bank and the Bank of Japan) and foreign commercial banks. As a result, on a weighted average basis, the returns on deployments of the forex reserves were still in the black, the bankers added.

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