Reserve Bank's US treasury holdings touch an all-time high at $164.3 bln

The Reserve Bank, which has been snapping up greenbacks in the past two years, has also been lapping up US treasury bills and the holdings touched a record high in January.

The holdings rose by more than USD 2 billion between December 2019 and January 2020.

At USD 164.3 billion, the Reserve Bank's US treasury holdings is at an all-time high, show the latest data from the US Treasury Department.

The love for dollars and other US government assets began with the collapse of the gold standard or the Bretton Woods principles in the late 1970s and central banks moved to the fractional reserves system. Since then, the US dollar/T-bills have been the safest asset class for any central bank, despite getting one of the lowest returns.

 

While during the 2008 global credit crisis the return had been close to zero, the coronavirus pandemic has also yanked down the interest rates in the US to 0-0.25 per cent now and so will be the return on investments.

But for central banks, return is not the priority but safety and liquidity of their investments are.

Central banks, including the Reserve Bank of India (RBI), follow the principle of SLR (Safety, Liquidity and Return) for their investment decisions. Like its counterparts in other countries, RBI follows the safety first, liquidity second approach and return on their investment is only the third criteria.

According to the latest data released by the US Treasury, RBI raised its US bond holdings to USD 164.3 billion at the end of January this year, up 13 per cent from USD 144.9 billion a year ago. In December, the holdings were at USD 162 billion.

RBI purchases these bonds on behalf of India. The US Treasury Department releases foreign holdings data on a country-wise basis.

With the holdings worth USD 164.3 billion, India was the 13th largest investor in the American treasury bills after Japan (USD 1.21 trillion), China (USD 1.07 trillion) and the UK (USD 372.7 billion).

Even the Cayman Islands is way ahead with holdings of USD 216.1 billion while Saudi Arabia is just ahead of India with USD 182.9 billion worth holdings.

According to an analyst, one of the major reasons for this massive spike in a month could be the exodus of foreign funds from the country since the beginning of the year. Overseas funds pulled out over Rs 1.13 lakh crore from equities and debt in the Indian market amid the coronavirus scare as they are taking refuge in US assets.

And the way RBI has been lapping up US assets, its clear that the central bank is also chasing safer assets, the analyst said.

In a recent report, Bank of America Securities said RBI has a strong dollar arsenal to defend the rupee with a USD 30 billion fire power.

In March, RBI has done two tranches of dollar-rupee swaps of USD 2 billion each as the rupee was plumbing new lows every day. It has promised to sell more dollars to defend the rupee -- something the central bank is doing for the first time openly.

This had the forex reserves falling for the first time in 25 weeks. For the week to March 13, the forex reserves plunged by USD 5.35 billion to USD 481.89 billion. In the week before, the forex kitty was at an all-time high of USD 487.23 billion.