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India quietly raises US treasury holdings |
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Although the rupee remains under pressure, the Reserve Bank of India (RBI) has reduced its interventions in the foreign exchange markets, and past interventions were mostly in the form of non-dollar asset sales.
The reduced interest in propping up the rupee was apparent from India’s holdings in US treasury paper, which actually increased by $3.8 billion between October and March despite a steep drop in foreign currency reserves by over $24 billion due to interventions in the foreign exchange markets.
The year-to-date government borrowings through T-bills alone amounted to Rs 2.79 lakh crore. These borrowings were via 91-day, 182-day and 364-day T-bills. Another Rs 1.28 lakh crore of cash has been removed through long-term borrowings.
The indication is that RBI will continue to hoard dollar treasuries to conserve foreign currency reserves and eliminate risky assets in the portfolio.
Federal Bank’s MD and CEO, Shyam Srinivasan, said, “I don’t see the rupee appreciating significantly in the short term. Perhaps there may be an appreciation after some time.”
The rupee depreciation does not impact foreign currency reserves. In fact, it works as an incentive for exports and disincentive for imports as the cost of imports rises.
Currency depreciation usually means more income for companies in export-oriented businesses, such as IT and gems and jewellery. It also boosts tourism. While a weak rupee is bad news for companies dependent on imported raw materials, it doesn’t impact standalone refiners as they import crude and export finished product, thus neutralising the impact. The outlook for the rupee remains uncertain and it hinges on developments in Europe. European austerity will lead to cuts in imports and credit-funded growth. Traders say it will be negative for the rupee and push the exchange rate closer to Rs 60 a dollar, as forecast by CLSA. However most bankers say exchange rates will be range- bound between Rs 54 and Rs 56 in the near term.
According to US treasury data, RBI’s and other Indian institutions’ holdings of dollar treasuries are $43.9 billion. In October, when RBI began interventions to prop up the rupee, the holdings were $40.1 billion.
Besides RBI, investors in the US treasuries include the General Insurance Corporation of India and foreign branches of Indian banks. Even on a year on year basis, holdings increased by $4.1 billion.
Traders say the increase in US treasury holdings is a result of the pattern of interventions and an aversion to euro-denominated assets. Besides, US treasuries, foreign currency assets are also held in the US Federal Reserve Bank and the Bank for International Settlements as cash balances.
In addition, some reserves were also parked in the multilateral institution bonds, all dollar- denominated. The disaggregated figures of the investments are treated as market sensitive information, and therefore confidential.
But traders say that at various stages of intervention, RBI had opted to exit from its non-dollar currency holdings, especially the euro and the British pound. Both these currency asset holdings were diluted in view of the massive risk aversion in Europe.
ING Vysya Bank’s market economist Upasna Bhardwaj said, “The decline in forex reserves has happened largely because of intervention through sale of dollars only. The increase in US treasury holdings of India would have been offset by the revaluation effects and decline in other assets.”
The revaluation or appreciation of dollar assets was evident from the rise in the price of US treasury paper. The 10-year US treasury bond appreciated from 2.3 per cent to 1.7 per cent, implying that its price rose, implying an increase in the value of the assets.
US treasuries of all maturities also increased in value during the period. Indian entities, including RBI, hold most of their assets in short term US treasuries or those with tenures up to 5 years. Five- year dollar treasury notes have appreciated to 0.7 per cent and are still rising.
The rush to the dollar by global investors implies that the rupee is likely to remain under pressure in the coming weeks as import payments and debt servicing obligations mount. India’s weekly requirement for dollars for energy imports alone is about $3 billion.
However, there is a deficit of at least $20 billion in the foreign exchange market, partly on account of large imports, particularly of energy and raw materials. Besides, a large outflow is expected on account of redemption of foreign currency convertible bonds (FCCB) and foreign currency debt servicing obligations.
At least $6 billion is expected to be the FCCB redemption liability alone. The rupee has already shed 11 per cent since January and 13.5 per cent since last October.
Despite the pressure from multiple fronts leading to the dollar deficit, the rupee appreciated slightly on Monday to Rs 55.38, up from last weekend's Rs 55.72. But traders say this was largely on account of exporters selling their dollars and booking profits. Besides, there are also inward remittances from the non-resident Indians in West Asia.
Source : mydigitalfc.com
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