The Hindu Business Line : Indian holdings of US gilts down $2.2 b in September

Apart from RBI, other institutions holding foreign government securities include the General Insurance Corporation and foreign subsidiaries of Indian banks and foreign branches of domestic banks.

Bankers said that the sharp drop in holdings was partly on account of aggressive treasury operations mounted by RBI in anticipation of hikes in US interest rates. These hikes have already led to a reduction in the rate of return on investments in such securities, admitted by its internal review on foreign exchange reserves.

In fact, the US Federal Reserve Board has hiked its discount rate to 5 per cent after 12 hikes since last year, which was likely to further erode the rates of returns.

Bankers said that the reduction in securities holdings did not reflect any sharp fall in the foreign exchange reserves. Foreign exchange reserves were around $143 billion in September and there has been a marginal decline from this level. Instead, some of the holdings were liquidated and held as cash balances with other central banks, multilateral institutions and the Bank for International Settlements to maximise returns.

Bankers also said that the existing holdings of US Treasuries were also periodically reshuffled to insulate against losses due to depreciation.

Accordingly, bankers said that most of the holdings of RBI's investments in US Treasuries were of short tenor, mostly in the form of treasury bills, unlike Japan or China, who invest mostly in long-term securities.

Besides, bankers said that the reduction in holdings also 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.

For instance, in September 2004 also the holdings reduced to $14.5 billion anticipating liquidation of investments by foreign institutional investors.

Therefore, around this period, the demand for dollar liquidity tends to be high. In addition, bankers said that this year, the demand was also high on account of unhedged exposures by oil companies who were caught unawares by the international price spike.

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