India's investment in US Treasuries nears to a record $200 billion

The Reserve Bank of India has bought $40 billion during the virus-induced lockdown that sent the local economy plunging to historic lows while financial markets soared.

Since March, the RBI has been increasing investments in US Treasuries. It has hit a record high at $196.5 billion in August. India now ranks 12th outpacing Singapore, France, Canada.
MUMBAI: India's investment in US Treasuries has neared a record $200 billion in August amid a surge in flows and the need to keep it in safe assets.

The Reserve Bank of India has bought $40 billion during the virus-induced lockdown that sent the local economy plunging to historic lows while financial markets soared. It was at $196.5 in August versus $156.5 in March, show latest available US government data. A small portion of such money is likely to have come from large corporates.

This could well be a shield against any sudden bout of uncertainties, but at the same time could supress the RBI's income that might eat into the dividend to the government this year.


“US sovereign assets seem to have become safest after gold, amid worldwide Pandemic and elevated geopolitical risks" said Soumyajit Niyogi, director at India Ratings" Although UST investment crimps RBI’s income yielding much less than India’s sovereign bonds, but it acts as a safety net for countries having a sustained current account deficit.”

The benchmark US treasury yields less than halved to 0.76 from 1.88 percent this year. While this points to a lower interest income, early bird investors could well be sitting on mark-to-market gains. Bond yields fall when prices rise.

India’s benchmark bond yielded 5.94 percent on Monday.
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“The US dollar is the reserve currency of the world, and will remain so for the time being, due to the TINA (There is no alternative) factor,” said Joydeep Sen, consultant with Phillip Capital India. “Hence, in spite of twin deficits, US Treasury is safe haven investment. Diversification of investment of our forex reserves is important, but the RBI doesn't have too many options.”

Since March, the RBI has been increasing investments in US Treasuries. It has hit a record high at $196.5 billion in August. India now ranks 12th outpacing Singapore, France, Canada.

"Emerging markets are facing challenges of huge inflows and USTs are likely to remain a favoured option by emerging market central banks for some time till the situation stabilises,” Neogi said. Globally the UK is facing Brexit challenges and Germany has fiscal issues.

The central bank’s investment in US Treasury bonds had plunged by a record $21 billion in March as it sought to increase its dollar reserves amid global uncertainties.
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Japan and China continue to be the two top investors in the world’s safest assets with trillions of dollars. Both the countries however trimmed their investments in August. Japan now owns $1.278 trillion worth of US Treasuries compared with $1.293 trillion in the preceding month. China comes second with $1.068 trillion versus 1.073 trillion earlier.

US Treasury investments are gaining rapid currency across the world that is paying a heavy economic cost for the pandemic.
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