MUMBAI: India is likely to have made its second-highest annual investments in US Treasuries in 2017, with Mint Street buying dollars through the year to prevent the rupee from appreciating to levels that could potentially have hurt the country's export competitiveness.
The Reserve Bank of India's (RBI) holdings of US Treasury bonds have increased by $23.2 billion this year until October, marking the second highest annual investment in the instruments. The central bank purchased $33.8 billion in 2015, show data from Bloomberg.
"The record in forex reserves has triggered a spurt in UST investments," said Sujan Hajra, chief economist at Anand Rathi Financial Services. "The authorities would not like any sharp rise in the rupee's value and will continue to intervene in the forex market. This will further help shore up dollar reserves, which in turn may lead to more investment in US Treasuries."
It touched a record high at $145 billion in September, but fell a bit to $141.4 in October.
India's forex reserves rose to more than $400 billion amid steady dollar flows. The central bank intervenes in the currency market either through buying or selling of dollars, a move aimed at curbing intra-day volatility.
The RBI is said to be buying dollars to check any sharp rise in the rupee's value as the local unit has gained about 5.50% this year.
"US Treasuries are a safe investment bet and considered a globally liquid investment product," said Srinath Sridharan, a member of the US-India Strategic Partnership Forum. He is also a member of the group management council at Wadhawan Global Capital.
"With increasing policy engagement and trade association between the US and India, the RBI's investment in US Treasuries is likely to increase in the coming years. India is also seen as an important partner-market for the US," Sridharan said.
With Indian investments at a record high in US treasuries, the returns for the RBI could fall as policy rates are set to climb in the US, leading to a decline in bond prices.
"There could be some notional losses with rising UST yields, but the objective of such investment is primarily safety and liquidity," Hajra said.
In the past one month, US benchmark yields shot up about 15 basis points to 2.48%.
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