India sharply cuts exposure to US govt securities to $156.5 billion in March

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May 25, 2020 10:24 PM

India's holding declined by USD 21 billion to USD 156.5 billion at the end of March. The exposure was at a record high of USD 177.5 billion in February and USD 164.3 billion in January.

The plunge in India’s holding of US Treasury securities could also be partly attributed to the fall in rupee or the central bank booking profit as assets would have given higher yields.

After increasing the holding of US government securities for two straight months, India sharply trimmed its exposure by a staggering USD 21 billion to USD 156.5 billion in March. The latest holding is also the lowest in 11 months. In April last year, the same stood at USD 155.3 billion, according to data from the US Treasury Department.

The Reserve Bank of India buys these bonds. Japan had the highest exposure to the American government securities with holdings to the tune of USD 1.271 trillion, followed by China with USD 1.081 trillion and the United Kingdom with USD 395.3 billion.

India’s holding declined by USD 21 billion to USD 156.5 billion at the end of March. The exposure was at a record high of USD 177.5 billion in February and USD 164.3 billion in January. In December, the holding was worth USD 159.2 billion, the data showed.

In terms of exposure, India is at the 13th position.

An official said the RBI invests in foreign assets as part of its prudential liquidity management. Like any other investor, it keeps buying and selling them depending on the value and liquidity needs. It also keeps changing the composition of the foreign investment regularly, the official added. It can be noted that the rupee was being hammered till the middle of March due to concerns over COVID-19.

In the week to March 20, the forex kitty fell the most in as many as 12 years to the tune of USD 11.98 billion, as the central bank sold dollars to arrest the slide of the rupee, which had even fallen to a record low of 78 to dollar amid a flight of capital from emerging markets to safe havens.

The plunge in India’s holding of US Treasury securities could also be partly attributed to the fall in rupee or the central bank booking profit as assets would have given higher yields. RBI spokesperson did not respond to a call from PTI.

Dollars and other US government assets began to be among the preferred ones for investments, with the collapse of the gold standard or the Bretton Woods principles in the late 1970s and central banks moved to the fractional reserves system. Since then, the US dollar/T-bills have been the safest asset class for any central bank, despite getting one of the lowest returns.

Central banks, including the RBI, follow the principle of SLR (Safety, Liquidity and Return) for their investment decisions. Like its counterparts in other countries, the RBI follows the safety first, liquidity second approach and return on investment as the third criteria.

India’s foreign exchange reserves rose by USD 1.73 billion to USD 487.04 billion in the week to May 15, which is equivalent to 12 months of imports, according to RBI data. Between April 1 and May 15, the foreign exchange reserves have increased by USD 9.2 billion. In the week ended May 8, the reserves had surged by USD 4.23 billion to USD 485.31 billion. It had touched a life-time high of USD 487.23 billion in the week to March 6, after it rose by USD 5.69 billion.

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