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RBI Trims its Gilt Holdings as Rates Rise in US

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The Reserve Bank of India is trimming its holding of US Treasuries joining many other emerging economies which have been selling off US bonds amid rising rates. Yet, it figures in the list of top-15 foreign lenders to the US government. RBI sold $16.3 billion worth of US treasury (USTs) bonds since April with its stock slipping from $157 billion as of March-end to $140 billion as of August-end, according to the latest data released by the US Treasury department. In the same period, China sold USTs worth $22.6 billion, while Taiwan sold $6.9 billion worth of USTs. This could be to reduce their mark-to-market losses as bond prices fall when interest rates rise.
In India’s case, it is also due to the fact that RBI needed US dollars to sell in the market to stop the steep currency slide. The Indian central bank sold foreign currencies worth $18.6 billion in the spot market since April to rein in the value of the rupee. Foreign portfolio investors have pulled out more than $10 billion of their investments in Indian markets since April. This has resulted in the rupee losing more than 10% in value against the dollar. “If FPI flows do not revive amid an USChina trade war, the RBI may need to sell another $10-15 billion by March,” stated a report by Bank of America Merrill Lynch. There could be more pressure on RBI to sell its holding of US bonds to meet dollar demand.
The Reserve Bank could also be using a part of the sales proceeds of USTs to buy gold as it is seen as a hedge against volatile currencies. During the same period, RBI has bought 6.3 lakh troy ounce worth of gold. The outstanding stock of gold in its reserves rose to 18.64 million troy ounce in August from 18.01 million troy ounces in March 2018, according to data submitted to the IMF. Of the $400 billion worth of foreign currency reserves as of August 2018, $239 billion is invested in top rated sovereign bonds, $20 billion is in gold and the balance is parked as cash with foreign central banks, commercial banks and multilateral agencies.

The Economic Times, 22th October 2018

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