India’s holding of US treasuries hits $59.8b in Sept

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India’s holdings of US treasuries rose to $59.8 billion in September despite shrinking foreign currency reserves.

According to data released by the US treasury department, the holdings represented an increase of $18.6 billion over the September 2011, though lower than August’s record holding of $60.6 billion. The rise in the holdings comes with India shifting its assets away from euro and the pound sterling denominated assets to the dollar, which is presently seen as an international safe haven currency. Among the entities that India invests in US treasuries include the RBI, the General Insurance Corporation of India, public sector banks with subsidiaries in the US.

Most holdings though remain in tenors of less than ten years. The shift comes even as countries, like China, have divested their US treasury investments by about $114 billion. But traders said, the increase in US investments was largely by public sector financial institutions that had held balances in the US banks as part of their correspondent balances.

They added that the shift was triggered by risk aversion among Indian banks. Most Indian banks have shifted to treasuries, especially short-term treasury bills. This was because treasuries are guaranteed by the US government, and are treated as highly liquid instruments.

Cash balances in US banks, however, are more in the nature of non-interest earning current accounts, have no such safety nets. The Federal Deposit Insurance Corporation, too, does not cover foreign residents and institutions. The shift to short-term US treasuries pulled down the yield to 0.08 per cent in September from 0.17 per cent in July.

The increase in the treasury holdings also coincided with the contraction in foreign currency reserves of the country. In September, India’s foreign currency reserves amounted to $259.96 billion compared to $275.70 billion in September 2011.

The fall in reserves also coincided with the widening current account deficit (CAD). Credit rating agency ICRA’s economist, Aditi Nayar, said, “CAD is expected to widen at an absolute level in second quarter of the financial year 2013, relative to the first quarter and exceed 4 per cent of GDP. For 2012-13, we have revised our expectations of the deficit to $70 billion slightly higher than our previous estimate of $69 billion.”

The dismal forecasts have roiled the foreign exc­h­ange markets, and driven the rupee down to Rs 55.75 to the dollar. Since the begi­nning of October, the rupee has shed over 8 per cent.

However, another indicator, credit default swap (CDS) premium has moved in the opposite direction. CDS is an over the counter derivative product that protects investors in bonds and credit products from default risks. The five-year CDS premium for the State Bank of India that is treated as mirror for sovereign risk in the international financial markets was down to $2,50,000 for every $10 million of risk covered.

Rating Agency CARE’s economist, Madan Sabnavis, said, “Capital flows will help cover the large current account deficit and the rupee will remain in the range of Rs 54-56 for most part of the year. The deviations in either direction would only be temporary.”

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