India has emerged as the top buyer of US treasury paper with aggregate holdings growing 63% y-o-y as of May-end as RBI seems to have invested the entire increase in foreign exchange reserves into US bonds.
India increased the holdings of US treasury bonds by $44 billion to an outstanding $114 billion in May, data from the US treasury department showed. The RBI, the custodian of the country’s forex reserves, is the largest buyer of foreign securities. The central bank’s forex reserve stockpile has risen by $40 billion in the same period.
Moreover, the RBI has been steadily increasing the share of the US bonds in the overall investment of foreign exchange reserves. As of March end, investment in US bonds formed a little over 50% of the total investment of foreign exchange assets in various securities. A year ago, the share was 40%.
“The RBI has been intervening a lot in the market by buying dollars. It needs to earn a return on its investments. With the eurozone problem intensifying, we do not want to buy German bunds,” said Abheek Barua, chief economist at HDFC Bank.
The yield on the 10-year US bonds fell 50 basis points in the year ended May while that on German bunds fell more than 100 basis points. The 10-year US bond was trading around 2.28% while German bunds were trading around 0.70% on Wednesday.
The Reserve Bank of India deploys its reserves in top-rated sovereign papers and as cash with other central banks, IMF and BIS. Besides, holding some reserves in gold, the RBI also parks a portion of reserves in fixed deposits of foreign commercial banks. The central bank’s investment decisions are driven mainly by safety and liquidity rather than returns of the asset class.
On other hand, China has been selling US bonds. China is still the biggest lender to the US and holds a whopping $1.3 trillion worth of US bonds. India’s ranking has risen to 13 from 17 a year ago.
In May, the purchases of bonds by foreign entities was the highest in over a year, according to the US treasury data. Purchases of US treasuries by foreign entities totalled $53.4 billion, the largest since February 2014.