India trims exposure in line with the overall reserves management strategy of RBI

MUMBAI: Even as other foreign investors are increasing their exposure to US treasury bonds, India has trimmed its exposure in line with the overall reserves management strategy of the Reserve Bank of India (RBI). Data released by the US treasury department indicates that India, essentially the central bank, trimmed its exposure by $5.6 billion between April and September this year to $36.5 billion. India figures among the top 20 investors in the US treasuries.

Interestingly, Indian investors (or RBI) are pulling out of the US treasuries even though bonds rallied after the sovereign downgrade by ratings firm Standards and Poor's . "It could be merely because of diversification of assets, as a change in reserves management strategy, since at some point there were jitters about rising yields on US treasury bonds," said an economist with a new private bank requesting anonymity.

The current exposure to the US treasury securities is a little over 10% of its total foreign exchange reserves which is close to $300 billion. RBI is facing a volatile currency market which calls for carefully managing the foreign exchange market. The rupee has slipped 14% against the dollar and has touched to new lows against the dollar. It is possible that central bank has decided to hold its foreign currency reserves in more safe and stable assets such as liquid deposits with foreign central banks or in bonds of other AAA sovereigns.

According to RBI data, the central bank has also trimmed its overall exposure to securities in the same period . Its foreign currency deployed in securities, essentially AAA-rated sovereign bonds and securities, which include sovereign bonds issued by the US government as well as many other advanced economies' sovereigns. India's forex reserves deployed in securities dipped from $147 billion in April to $144 billion in September . "One of the advantages of investing in securities is that an investor earns a carry.

But at times of uncertainties in the market, there is a tendency towards flight to safety,'' said an economist with a European bank. Though RBI was seen hiking its exposure to deposits with central banks between April and August, it pulled out significant amounts in September, probably to meet forex demand as overall reserves dipped about $9 billion during the month. Among the other economies to trim their exposure to the US treasuries during the period are Taiwan, Hong Kong, Russia and Thailand.

Source: EconomicTimes