India’s Dollar Treasury Holding Rises to a Record $41 bn .

India's holdings of US Treasuries rose to a record $41 billion in September this year, despite the Reserve Bank of India's (RBI) negligible intervention in the foreign exchange markets.

Data released by the US Treasury Department showed that India's holdings had gone up by $2.2 billion from the corresponding period of the previous year. This financial year alone, beginning April, the increase in US treasury holdings was $10 billion.

India's increased holdings was in direct contrast with that of China. India’s Asian neighbour, which is the world's largest holder of US treasuries, shrank its holdings in September. China's holdings of dollar treasuries in September this year was worth $883.2 billion, down $17.1 billion from April 2010. China's holdings were also $55 billion lower than September 2009.

Institutions that invest in US treasuries include the RBI, State Bank of India (SBI) and foreign branches of public sector banks and the Indian reinsurer, General Insurance Corporation of India.

Indications are that the increase in the dollar holdings is largely stemmed from portfolio churning. This implied that the RBI and the financial institutions that hold foreign treasuries, had shifted from the Euro and Sterling denominated holdings into dollar treasuries. But, the rise in dollar treasury holdings also came ahead of the US Federal Reserve Board's much touted Quantitative Expansion phase two (QE2), which implies further expansion in dollar liquidity.

The increased holdings were almost entirely into dollar treasury bills (of maximum maturity of one year) and treasury notes (of maturity under 10 years). Treasury bill holding in April was $6.65 billion and by September this year it was $16.15 billion. This was on account of the liquidity in the system. Short-term treasury bills are far more liquid than long-term securities. Indian institutions have stayed away from long-term treasury bonds as a consequence.

The increased investments were despite the fact that the country's foreign exchange reserve was only $264.53 billion in September 2010, well below the peak holdings of $304.23 billion in April 2008. This year, despite the flood of portfolio flows into the country, the RBI has intervened only once in the foreign exchange market. The muted interventions, in turn, resulted in Rupee's appreciation against the dollar by 3 per cent on a year-on-year basis.

The muted intervention was also partly based on the costs. Purchase of dollar liquidity from the Foreign Institutional Investments (FIIs) and parking the same in US Treasury bills generated yields of just 0.2 per cent. Intervention also resulted in the expansion of rupee liquidity, which in turn would have to be sterilised from the markets, through the reverse repurchase window (RBI's sale of securities for removing liquidity).

The reverse repo rate is currently at 5.25 per cent. But the absence of intervention has resulted in severe shortage of rupee liquidity in the domestic financial markets, leading to increased recourse to the repo window, analysts said. This year, unlike in 2007 and 2008, the FII flood has actually translated into banks borrowing from the repo window. Borrowings through the repurchase window was a record Rs 1,22,945 crore.

Source : tehelka.com