MUMBAI: Indian holdings of US Treasuries touched a record high of $148.6 billion in January, with New Delhi racing past Saudi Arabia as a buyer of the planets safest financial asset in the first month of the year.
Record high foreign fund flows are prompting Indias central bank to buy more US gilts, of which India is now the worlds 11th-highest holder.
“There has been an increase in forex currency assets, which has prompted such action,” said Madan Sabnavis, the chief economist of Care Ratings. “Investments in UST can be due to safe haven preference compared to other central banks. The Reserve Bank will continue to allocate more of the foreign currency assets to UST as the US economy also appears to be becoming stronger.”
By end-June last year, the central bank held 36 per cent of total foreign currency assets (FCA) in UST, according to Care Ratings. UST were at $130.3 billion out of total FCA at $362.3 billion. By January, the share went up to 38 per cent (or $148.6 billion) with total foreign currency assets at 393.7 billion. “If forex flows increase, investments will increase in US treasuries,” said Sabnavis.
The reserves had touched a life-time high of $421.914 billion on February 9 this year. It had crossed the $400-billion mark for the first time in the week to September 8, last year. Moreover, the central bank also accumulates dollars whenever it buys the greenback from the spot currency market, a move that curbs any sharp rise of the rupee. “It is not surprising to see the RBI park the bulk of its reserves in such securities,” said Radhika Rao, an economist at DBS Bank. “Globally, USTs are considered as a safe and highly-liquid investment product. India is not alone in ramping up its purchases, with China having increased its holdings last year by the most in seven years.”
“Rising UST yields lower its attractiveness, which might see the central bank slow its purchases in the year ahead,” she said. During the June-January period, US yields have moved up to 2.70 per cent from 2.20 per cent. It may have contributed at the margin to such decisions.
Besides, interest rates are poised to move up in the future. Since November, the central bank has increased its US holdings by about $ 8 billion. In January, it improved its rank by one notch.