The Hindu Business Line : India’s holdings of US Treasury on the rise

Bangalore, Nov. 19 India’s holdings of US Government securities increased by $3.4 billion in September this year, on a year-on-year basis, despite the dip in foreign currency holdings.

Data sourced from the US Treasury Department showed that India’s holdings rose to $14.2 billion as against $10.8 billion during the corresponding period of the previous year.

The institutions that invest in US Treasuries, besides the Reserve Bank of India, include the General Insurance Corporation of India, foreign branches/subsidiaries of domestic banks and domestic mutual funds that are permitted to invest in foreign securities.

The holdings also showed a rise by $2.4 billion since the beginning of this financial year.

This was despite the sharp drop in foreign exchange reserves during the period for market interventions and for supporting refineries through special market operations. Reserves dropped by $2.2 billion in the first six months of the current year.

Interestingly, the increase in RBI’s exposure to US treasuries came despite the massive portfolio outflows, led by foreign institutional investors during the first six months of the current year. FII outflows during the period amounted to about $5.094 billion.

Risk perception

Traders said that despite these trends, the shift to US Treasuries was triggered by increased risk perception.However, most Indian institutions preferred holding short-term securities with the average maturity rarely exceeding one year. The increased risk perception stemmed from the US financial sector meltdown.

Evidence of the increased risk perception was available from the contraction in US banks’ liabilities to Indian banks and financial institutions.

In fact, most Indian banks preferred restricting their balances in US banks to just their correspondent accounts.

In addition, traders said that the increase in US treasuries investment also stemmed from conversion of some holdings in Euro-denominated and Pound Sterling-denominated securities into US dollar securities.

Why the preference

The conversions were in anticipation of cuts in US interest rates and the sharp dollar uptrend during the period. The preference to US treasuries came as some of the Euro and Sterling denominated securities depreciated in value. During this period, the Fed funds rate , the rate at which US banks lend reserve funds to each other, dropped 0.5 per cent from 2 per cent in April this year.

But during the period, US banks’ liabilities to India institutions also increased. Gross liabilities denominated in dollar amounted to $18.20 billion. For the Indian institutions, the liabilities implied foreign assets. The increase was largely contributed by a rise in custodial liabilities, which included investments in short-term US treasuries for higher yields and for security purposes.

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