The Hindu Business Line : PSBs taking guard against falling dollar

Faced with a deteriorating US dollar, public sector banks (PSB) are beginning to reduce their cash and cash equivalent balances with the American banks and shifting to the Euro.

Top PSU bankers, who declined to be named, said that the steps were taken to cut losses due to exchange rate depreciation. At one point of time the US dollar was the favoured currencyof the Indian bankers for maintaining their correspondent account or nostro balances. But dollar balances are now on the descent. This is evident from sharp drop in custody liabilities of US banks that included nostro balances. During the first nine months (January to September) of the current calendar year, the balances dipped by over $4.8 billion, according to the US Treasury Data. Between April and September this year, the drop was over $9.5 billion.

ICICI Bank’s chief economist, Dr. Samiran Chakraborty, said, “With the dollar depreciating, it does not make sense to have large balances with American banks. Holdings will be restricted only for meeting asset-liability requirements.”

Quite a number of banks are shifting large portions of their surplus balances to euros, yen and even yuan denominations to offset exchange losses. At the beginning of April this year, euro was worth $1.34.

As on November 29, the euro is worth $1.39. Some of the banks with international operations taking dollar deposits are deploying the same in euro or yen or even Swiss franc denominated assets.

Says State Bank of Mysore Managing Director, Mr P. P. Pattanayak said, “Cross-border lending is always done on a back-to-back basis.”

US Treasury holdings

Moreover, banks were also moving out of dollar treasuries. PSBs with international operations hold only a small portfolio of U S treasuries. Even the small holdings are in short term treasuries with a maturity profile of 91 days or even less. But even these have declined considerably since the beginning of this year.

Between April and September, holdings of short term treasury obligations dropped $10.3 billion. Bankers said, “We have little interest in holding US treasuries. The coupon rates are far too low.” The yield on three month $ T-bill is barely 3 per cent.

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