India’s now among top 10 buyers of US treasuries

For the first time, India has featured in the list of top 10 sovereign investors in US Treasuries.

At the end of October, the count was at a new record high of $222.4 billion, showed latest data. That should give sufficient cushion to Asia’s third-biggest economy when interest rates turn globally – and currency volatility becomes manifest in the money hubs of London, New York and Tokyo.

“Yield income is not the purpose of such investment,” said Madan Sabnavis, chief economist at CARE Ratings. “This is to ensure the safety of forex reserves. Instead of keeping it idle, the central bank invests in highly liquid US bills. Safety and liquidity are the two motivations and not the returns. The central bank should be in a position to liquidate such assets without loss in case of adverse market swings.”

Between March and October last year, the benchmark US paper dropped to a historic low, yielding as low as 0.52%.

India has now outpaced Cayman Islands, Taiwan and Singapore in improving its UST investment rank to 10 from 13 a few months ago.

Since March last year, the Reserve Bank of India (RBI) invested about $66 billion in US treasuries. Mint Road may extend the purchases given its expanding foreign currency reserves.

India’s forex reserves hit a new all-time high at $586 billion, show data from the central bank.

“In the world of uncertainty, the only defence that India has against any contagion is high forex reserves,” said Indranil Sengupta chief India economist BoA Securities. “One of our three certainties for an uncertain 2021 is that the RBI will continue to build forex reserves to buffer against contagion. You will not get foreign investors if the rupee is volatile.”

Japan and China remained top two investors in the US Treasuries. Hong Kong is just ahead of India by about $7 billion.

Sustained accretion to foreign exchange reserves, according to RBI governor Shaktikanta Das, has improved reserve adequacy in terms of conventional metrics such as cover for imports.

“Sound external sector indicators augur well for limiting the impact of spillovers of possible global shocks and financial stability concerns as investors and markets are credibly assured of the buffer against potential contagion,” he said last week.