The Hindu Business Line : Indian holdings of US securities on the decline

Bangalore, May 19 India dumped $3 billion worth of US treasuries in March this year taking advantage of the US Federal Reserve Board’s soft interest rate bias.

Indian holdings of the US Government securities, that also included treasury bills, were $11.8 billion, according to data available from the US Treasury Department. During the financial year 2007-08 alone, the Reserve Bank of India (RBI), domestic banks with foreign operations and financial institutions unloaded about $8.3 billion of securities. This was despite the fact, that during the same period, India’s foreign exchange reserves were about $309.161 billion, an increase of over $100 billion.

The move is largely intended to cut risks of US exchange rate depreciation. Most of the gains were moved into balances with the other central banks of the world that included the European Central Bank, Bank of England and Bank of Japan and with multilateral financial institutions that included the Bank for International Settlements. Bankers said that trend was clearly intended to cut exchange rate depreciation losses and diversify the foreign currency reserve basket.

Quiet moves

In fact, during the whole of last year, the RBI has quietly increased the component of the euro, the Swiss franc, the pound sterling and the Japanese yen in the reserves basket. This was essentially to take advantage of the appreciation of those currencies against the dollar . Between April 2007 and March 2008, the dollar depreciated by over 18 per cent against the euro, from $1.33 to $1.58. Bankers said that the diversification of the reserve basket was also partly due to crude oil suppliers such as Iran invoicing oil shipments in euros. Besides, some European importers were also beginning to invoice in euros.

That the shift had taken place was evident from the massive reduction in dollar denominated liabilities to Indian institutions. American financial institutions’ liabilities to Indian banks and financial institutions were down $9.9 billion . Gross liabilities, including custodial liabilities and short term treasury bills holdings, were $15.440 billion in March this year, as against $25.347 billion in April last year.

Treasury gains

The shift, the bankers said, implied that the RBI actually made large treasury gains in the process. This was because during the whole of 2007, the Federal Reserve kept cutting key federal funds rate The Fed’s last reduction was in April this year, when the rate was brought down to 2 per cent. In May 2007, the rate was 5.25 per cent.

The profits earned from such aggressive treasury operations, bankers said, had partly cut RBI’s losses incurred in the open market operations for sterilising the excess liquidity.