India’s appetite for US treasury bills rising
US treasury yields have come down this quarter.
The RBI held $144.9 billion of US treasury securities at the end of January, according to the latest data released by the Department of the Treasury. That compares with $138.2 billion at the end of October, which was the lowest level in 2018. India’s purchases over the three months aggregated to about $6.7 billion. “Of the many possible reasons for the rise in US treasury investment, one could have been a redeployment from other currencies into the US dollar, given expectations of valuation gains with the Fed increasingly moving towards a more accommodating policy,” said Saugata Bhattacharya, chief economist at Axis Bank. After losing almost $30 billion from its forex kitty between April and early November, India’s forex reserves slowly started increasing in mid-November.
“Part of this might also have been due to deployment of fresh forex assets of RBI with higher dollar inflows seen in late 2018,” said Bhattacharya. Other economists corroborated the view. “RBI’s foreign currency reserves have increased since the end of October 2018 and some of these additional reserves have likely been deployed into US treasuries,” said Ananth Narayan, associate professor of finance at SP Jain Institute of Management and Research.
US treasury yields have come down this quarter and the RBI should have revaluation MTM gains on its bond portfolio. The 10-year US Treasury yields have fallen 60-70 bps since November and are now at 2.44 per cent. Bond yields and prices move in opposite directions. “However, such gains are not booked as income unless they are recognised through sale of bonds,” Narayan said. A Morgan Stanley report said the US FOMC kept the federal funds target range unchanged at 2.25-2.5 per cent at its March meeting, leaving all the action for the accompanying materials where policymakers indicated no plans for rate hikes this year, and a more dovish policy path over the next couple of years, alongside plans to wind down balance sheet normalisation beginning in May and concluding at the end of Sep tember 2019.
This could mean that if yields move down and bond prices rise, there is a good opportunity for the RBI to book profit by again offloading securities and moving to other eligible investments.