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C. Shivkumar

Bangalore, Aug. 22 Indian institutions’ holdings of US treasuries dropped $3.3 billion in June this year with the launch of special market operations by the Reserve Bank of India to extend support to public sector oil companies struggling in the face of rising crude prices.

According to the US Treasury Department data, India’s holdings were down to $11.7 billion, the sharpest drop on a year-on-year basis. Among the institutions that invest in US Treasuries include the RBI, General Insurance Corporation of India, foreign branches/subsidiaries of domestic banks and domestic mutual funds that are permitted to invest in foreign securities.

Traders said that a large part of the drop in dollar treasury holdings came from the treasury operations by the RBI and the consequent SMOs. SMOs were instituted in June for meeting the refinery funding operations. The operations involved purchase of subsidy bonds from the refining companies and advance of dollar to them for meeting crude oil payment obligations.

Banking sources said the SMOs were also prompted by the low earnings from dollar treasuries. Most of RBI’s holdings of US treasuries are in the form of short-term securities. The yields on dollar treasuries ranged between 1.6 per cent for 30 days and 2.36 per cent for one year. Traders said assuming the cost of sterilisation at 6 per cent, which is the reverse repo rate, the spread was negative by at least 4 per cent. The negative spread implied that accretions to the foreign exchange reserves were imposing costs.

The exit from dollar treasuries to oil bonds shifted the spread into positive territory, bankers said.

Oil bonds were picked up by the RBI at yields of any where between 8.75 and 9.5 per cent. Oil bonds are also sovereign issued securities issued by the Government against outstanding payments to the refining companies. Most of the purchases of the oil bonds were long-term securities. The RBI, till August-end, had purchased about Rs 20,000 crore ($4.5 billion) of oil bonds from the refineries.

Besides, bankers said, that RBI also moved part of its holdings to other currencies, particularly to the euro and pound sterling, in view of dollar depreciation, along with the low yields.

This tended to shear the interest earnings from the dollar securities. In addition, a large part of the country’s foreign exchange reserves of over $300 billion was also parked as cash balances with some of the multilateral institutions, including the Bank for International Settlements.

Net inflows have, however, slowed down. The net inflows were largely triggered by exits by foreign institutional investors. In June this year, the RBI’s net foreign currency sales amounted to $5.22 billion. Most of the sales were to refining companies.

Inflows were mostly on account of NRI inflows for equity investments. Such investments amounted to about $2.2 billion in the first quarter of this financial year and are treated as part of foreign direct investments.

The FDI component also showed signs of slowing down according to the data. NRI investment flows for share acquisition was the lowest in June of barely $398 million.

More Stories on : Forex | Overseas Investments | Financial Institutions | Debt Market

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