The Hindu Business Line : Indian holdings in US treasuries rise to $13.7 b

Short course
Bankers opine data of absolute increases misleading
Investments comprise just 5% of forex reserves
More reserves held across central banks of Europe

Our Bureau

Bangalore, Dec 21 India’s investments in US treasury securities rose by $4.1 billion in October on the back of surging foreign exchange reserves.

According to data released by the US Treasury Department, India’s investments were $13.7 billion in October this year. In September this year, the investments were $9.6 billion and $12 billion in October 2006. The financial institutions that invest in US government securities, besides the Reserve Bank of India, include General Insurance Corporation of India, which has global re-insurance operations and foreign branches/subsidiaries of domestic banks. However, the bulk of the investments was parked in short-term treasury obligations. Investments in such short-term treasury obligations with maturities ranging from 14 days to 3 months, was $3.14 billion on a month-on-month basis, the data showed.

Bankers who declined to be named, however, said the data of absolute increases in US treasuries were misleading. This was because as a component of the gross foreign exchange reserves, investments in US treasuries were miniscule. The investments comprised barely five per cent of the exchange reserves and only about 5.2 per cent of the gross foreign currency reserves. A year ago, at least 7 per cent of the reserves were held in US treasuries. In fact, more reserves were held in the form of cash and cash equivalent balances across central banks of Europe – European Central Bank, the Bank of Englandand the Bank for International Settlements.

Besides, some funds were also parked in multilateral institution securities, to ensure that the weighted average returns were higher than the costs of intervention in the domestic financial markets. The cost of intervention is currently estimated at about 6 per cent, which is the prevailing reverse repurchase rate.

The bankers said India, unlike most cross-border investors in US securities, largely abstained from investing in long-term US treasuries and risk weighted securities, in view of the premium attached to liquidity and safety. It was this strategy, the bankers added, that had largely insulated Indian institutions and banks from losses in the US sub-prime meltdown.

The bankers said that, in fact, anticipation of reductions in the US Federal Funds rates have actually resulted in assets appreciation, resulting in treasury profits. For instance, three month US treasury yields in September averaged 4.15 per cent and in October, the yields had softened to 3.92 per cent.

The bankers said almost all the domestic institutions operating in international financial markets, including foreign branches of domestic banks replicated the RBI’s pattern of treasury operations to ensure maximum returns on investments at minimum risks.

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