Mumbai: The Reserve Bank of Indias US Treasury holding in April shrank the most in about a year and half, which economists primarily attributed to the RBIs market intervention to support the rupee. This comes at a time when climbing yields are set to crimp returns on the holding, or even lead to losses.
In April, the RBIs US Treasury holding fell $4.2 billion to $152.8 billion, show latest data from the US Federal Reserves. That was the steepest since a $4.3 billion fall recorded in November 2016.
“The RBI has been intervening in the market and with USTs being the most liquid, it would make sense for them to sell some of those,” said Shashank Mendiratta, India economist at ANZ Bank. “Both domestic and external factors are also currently stacked against flows. Despite improving growth, the factors that had supported fiscal consolidation, lower inflation, and the current account deficit have faded.”
Indias trade deficit, or the cost of imports over the value of exports, widened to a four-month high of $14.62 billion in May, compared with $13.7 billion in April.
A cocktail of factors including rising US Treasury yields, high oil prices, and a stronger US dollar is expected to keep Indias asset markets under pressure. Unlike last year, reserve accumulation will remain muted this year.
“All of this should suggest that the RBI holding of the USTs is unlikely to rise from here on,” said Mendiratta.
The RBI sold about $6 billion debt in April — the highest also since November 2016 when it repaid special deposit investors — as the central bank attempted to lessen the slide of the rupee in the wake of an emerging market sell offs amid hardening US interest rates.
“While the RBI does not make details of its currency reserve holdings public, some of the drop in RBI holding of US Treasuries may mirror this drop in US dollar reserves on account of currency intervention,” said Ananth Narayan, a professor of finance at SP Jain Institute of Management and Research in Mumbai.
The central banks forex reserves fell to $419 billion in the first week of May from $425 billion as of March 30, according to RBI data.
This reflects both revaluation of non-US dollar reserves and RBI intervention to sell the dollar in currency markets, said Narayan.
US Treasury bonds are perceived to be the safest investment bet in the world.
During April, US 10-year benchmark yields rose about 20-22 basis points. It peaked at 3.11% in the third week of May. Bond yields and prices move in opposite directions.
It has been trading in the range of 2.80-2.90% in the past few weeks.
China and Japan are top two sovereign investors in US Treasuries with more than $1 trillion holdings each.