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RBI turns net buyers of US Treasuries in September

The RBI bought $3.4 billion of securities during the month to increase its holdings to $144 billion, according to data from the US Federal Reserve Board.

, ET Bureau|
Dec 11, 2018, 11.09 PM IST
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MUMBAI: The Reserve Bank of India was a net buyer of US treasury securities in September, snapping a five-month selling streak. The Indian central bank may have sought to earn higher interest income from the world’s safest debt investment, anticipating a softening of US sovereign yields that has risen to seven-year high this year.

The RBI bought $3.4 billion of securities during the month to increase its holdings to $144 billion, according to data from the US Federal Reserve Board.

“RBI buying US treasury bonds in September, the first time after five months of selling, was unusual in the context of the extreme financial market volatility that month,” said Saugata Bhattacharya, chief economist at Axis Bank. “The magnitude of the buy suggests that this was not a fresh allocation since India’s forex reserves were mostly static in September.”

India’s forex reserves were at about $400 billion throughout September, although they had eroded by about $7 billion by November end.

“An inference is that this might have been a rebalancing of RBI’s offshore investment portfolio into the safe haven of the dollar and US treasuries,” said Bhattacharya.

US treasury bonds are perceived to be the safest investment bet in the world. This year, the benchmark treasury yield shot up 47 basis points while it peaked at a seven-year high of 3.24% on November 8. It now yields 2.89%.

“An RBI treasury investment call on a future softening of US yields might have reinforced that decision,” said Bhattacharya.

The RBI sold $16.4 billion worth of US treasury bonds since April with its holdings slipping to $140.6 billion at the end of August from $157 billion at the end of March, the data showed.

“On a risk-return trade-off basis, the RBI has gone back to sovereign bonds of the world’s reserve currency economy,” said Joydeep Sen, consultant - fixed income, at Phillip Capital (India). “The primary objective of the RBI is not to make trading gains – the reason why they were not buying is to diversify.”

The US Federal Reserve is widely expected to change its interest rate stance next year as an element of slowing domestic growth looms. Policy makers, too, have hinted at a slower pace of rate increases.

Other emerging economies, too, had sold their US bonds since April, amid rising rates. India is ranked 13th among the major foreign holders of US treasury securities, which total $6.2 trillion. China leads with holdings of $1.15 trillion, followed by Japan with $1.03 trillion.

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