The Hindu Business Line : Indian holdings in US treasuries soar to $32.5 b

Bangalore, March 18 India’s holdings of the US Government securities rose by $17.9 billion on a year-on-year basis despite a sharp contraction in foreign exchange reserves.

The US Treasury Department data released on March 17 showed India’s holding of US Treasury securities at a record $32.5 billion, as against the $14.6 billion a year earlier. 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.

Investments in US dollar securities rose by $3.3 billion between December and January alone. Foreign exchange reserves though contracted by slightly over $6 billion during the same period and by over $44 billion between January 2008 and January 2009. During the same period, the Reserve Bank of India intervened in the foreign exchange markets to calibrate the depreciation of the rupee against the dollar.

The intervention was partly to support the foreign exchange requirements of the oil refineries through special market operations (SMOs) and direct sale of foreign currency to importers. The SMOs implied purchase of special oil bonds by the RBI and simultaneous release of foreign exchange to the refineries. Since the beginning of the SMOs in June this financial year, the RBI has purchased Rs 31,680 crore of oil bonds releasing the equivalent of about $6 billion in foreign currency to the refineries.

Oil bonds

Traders said that the increase in the US treasuries holdings was largely on account of the preference for safe haven investments. With American banks facing a meltdown, many domestic banks have already reduced their holdings of deposits in US banks and shifted them to the US treasuries. Some of the public sector banks also reduced their corresponding balances in US banks, shifting them to US treasuries. This was largely because the corresponding accounts were not covered by the Federal Deposit Insurance Corporation’s safety net. At present, only US residents are covered by the FDIC. Besides, bankers said that many institutions also reduced their holdings in UK and Euro-denominated securities to the US Treasuries to derisk investment portfolios.

However, bulk of the holdings in US Treasuries was in short-term Treasury Bills. The preference for short-term Treasury Bills was largely due to high liquidity. Longer term securities tend to be less liquid. However, the yields on these securities were also low. For instance, the 90-day US dollar T-bill currently generates yields of barely 0.25 per cent, equivalent to the current Federal funds rate. One year securities generate higher yields of about 0.46 per cent.

Traders said the low yields not withstanding, there were still possibilities to make profits from Treasury operations. Banks are expecting one more round of the interventions when the Federal Open Market Committee meets for a further revision in the Federal funds target.