India’s exposure to US treasury securities rose to $220 billion in June this year from $200 million in March, according to the latest data released by the US treasury department. Investments rose despite yields on its benchmark treasury bonds rising yields. The Reserve Bank is one of the largest investors in the US government paper though Indian banks operating in the US and now even local banks also park funds in these paper. “While safety and liquidity constitute the twin objectives of reserve management in India, return optimization is kept in view within this framework,” The Reserve Bank said in its latest Report on Foreign Exchange Reserves.
Investment in government bonds is unattractive when yields rise. When bond yields rise, prices fall. This results in a mark to market loss to the investor when yields rise from the balance sheet perspective of the investor, as the value of the portfolio contracts. by around 50 basis points ( one basis point is 0.01 per cent). “I think it is more a function of reserves growing rapidly during that period, more than yield considerations,” said Rahul Bajoria, chief India economist at Barclays Capital. “Since RBI invests mostly in the short end and safest currencies, the US dollar is the central bank’s primary reserve currency.”
India’s foreign exchange reserves rose nearly $30 billion crossing the $600 billion mark during the period on strong foreign investment flows. Besides, commercial banks also are now eligible to invest in the sovereign paper of other economies in an attempt to facilitate surplus liquidity management.
“Over the last one year, RBI has been facing the challenge of managing domestic yields by way of purchasing domestic securities while the strong balance of payments position has been adding domestic rupee liquidity,” said Soumyajit Niyogi, associate director credit & market research at India Ratings & Research. “Therefore, more than the chasing yields, draining of liquidity through purchasing dollar-denominated securities has become a tactical option. I believe this has also caused more buying more US treasury bills.”
