The Hindu Business Line : Holdings in US treasury papers rise in value

India’s holdings of US government securities amounted to $14.6 billion in January this year, according to the data released by the US Treasury Department. The Federal Discount on March 16 was dropped to 3.25 per cent from 3.5 per cent. The discount rate is one of the major policy rates of the US Federal Reserve. The other policy rate is the Federal Funds rate.

Major Indian financial institutions that invest in US government securities, besides the Reserve Bank of India RBI, are General Insurance Corporation, which has global reinsurance operations, foreign branches / subsidiaries of domestic banks and domestic mutual funds that are permitted to invest in foreign government securities.

The rate reductions and anticipations of further reductions pushed up the values of US short-term treasuries. Currently most of Indian institutional holdings are in short term US treasuries and other liquid assets. At least $5.85 billion is held in the form of short-term US treasury bills and another $ 7.16 billion in the form of short term negotiable securities that include US Government securities and certificates of deposits.

The appreciation in the value of the holdings was apparent from the drop in yields of 30 day US treasury by almost 70 basis points to 1.16 per cent from the beginning of this month.

Gains shaved off

But part of this value was also shaved off by the depreciation in the exchange rate against other major currencies. The euro was worth $1.58 on March 17 from $1.51 from the beginning of this month. The dollar depreciated to 96 yen from 103.57 yen for the same period. Against the Indian rupee, the dollar actually appreciated to Rs 40.77 from Rs 40.26.

However, bankers said that changes in the values in of RBI’s holdings of dollar treasuries were largely notional. This was because the holdings were largely for liquidity management purposes. The implication was that the dollar inflows mopped up were parked in US treasuries. Accordingly, there was little possibility for any realisation of gains since the RBI seldom conducted treasury operations like commercial banks.

Arbitrage risk

The rate reductions have escalated the risk of arbitrage funds flowing into the country, triggering inflation worries in banking circles. This was particularly in view of the large arbitrage opportunities in view of the wide difference between dollar and domestic rates. With US short term liquidity available at under 3 per cent and the reverse repurchase rates at 6 per cent, there was room for arbitrage, bankers said.

However, ICICI Bank’s Chief Economist, Dr. Samiran Chakraborty, said, “Most arbitrage channels are already effectively blocked. The only way arbitrage funds can come into India is when the global liquidity expansion increases the appetite for risky emerging market securities.”

Already the RBI has bottlenecked External Commercial Borrowing window. Besides, capital controls have been put in place since August last year, curbing Participatory Note based inflows.

The blockading of the flows resulted in reducing the RBI’s interventions in the foreign exchange markets during the last one month. As a result, there was also very little infusion of market stabilisation securities into the market since the beginning of the month. Outstanding MSS securities between March 7 and February 29 this year, actually dipped by Rs 2,911 crore, according to RBI’s weekly statistical supplement.

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