The Hindu Business Line : RBI, institutions cut holdings of US treasuries

Since June this year, the RBI and domestic institutions have preferred to remain liquid. The advantage was that holding cash balances allowed the institutions to invest when yields are high and exit when they drop.

Bangalore , Oct. 21

INDIAN institutions and the Reserve Bank of India (RBI) reduced their holdings of US treasuries by $900 million in August this year.

According to data released by the US Treasury Department, Indian holdings dropped to $16.7 billion from $17.6 billion in July this year. However, the holdings were still higher than in August 2004 when it was $16.3 billion. Besides the RBI, other institutions holding foreign government securities include the General Insurance Corporation and subsidiaries of Indian banks abroad and foreign branches of domestic banks.

Bankers said the holdings did not reflect a slowdown in inflows. Instead they indicated a distinct pattern, when holdings tend to drop during the second half of the year. This was in anticipation of liquidation of investments by foreign institutional investors. In fact, FIIs are already liquidating their holdings.

Sources said some drawdown of reserves was also made for large-scale investments in the country and for import of petroleum products during the period.

Bankers said, however, that one of the major reasons for the reduction in holdings was the need to cut losses on account of depreciation. This was on account of the increase in short-term rates by the US Federal Reserve Board. The Federal Funds rate, the rate at which US banking institutions borrow overnight funds from each other, is now 3.75 per cent.

Since June this year, the RBI and domestic institutions have preferred to remain liquid.

Bankers said this meant that most of the reserves were parked in short-term US treasury bills or in cash balances to prevent losses on account of depreciation. The advantage was that holding cash balances allowed the institutions to invest when yields are high and exit when they drop. In each of these treasury operations the RBI and Indian institutions made large profits, bankers said. This was evident from the fact that long-term US treasuries had actually gone up due to aggressive purchases by Chinese institutions whose holdings were mostly long-tenor US treasuries.

Yet despite the profits and shift to liquid reserves, cash balances in US dollars held by Indian institutions were down to $12.717 billion according to the US data, from $14.176 billion. Bankers said the reduction in cash balances partly stemmed from the dispersal of holdings in other currencies, in particular the euro and the pound sterling where the interest earnings were slightly higher than dollar rates.

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