India buying US bonds, investment reaches highest level at $68.59 billion in December

MUMBAI: India is the lone country in the BRIC bloc to continue raising its investment in the US treasury even as China and Russia trimmed their exposure amid rising US yields, which could erode value of investments.

India’s investment in US treasury securities reached its highest ever level at $68.59 billion in December, data released by the US treasury department showed. China, the largest foreign owner of US treasuries, cut holdings in December by the most in two years. Its holding fell $47.8 billion, or 3.6%, to $1.27 trillion. So did Russia and Brazil.

The Reserve Bank of India may have been forced to raise its ownership of US bonds as its move to raise foreign exchange reserves through special deposit schemes led to about $34 billion flows. “India's investments in US treasuries are likely to have increased due to RBI's foreign currency assets increasing in the December quarter by around $20 billion, post the FCNR and bank capital inflows and net of payments to OMCs,” said Saugata Bhattacharya, chief India economist, Axis Bank.

“These funds needed to be parked in some securities, and US treasuries were probably the best safe haven.’’

International investors have been pummelled by recent movements in US treasuries after the former Federal Reserve chairman Ben Bernanke hinted at tapering of bond purchases in May. That led to yields on US treasuries nearly doubling to a high of 3% during the last year. His successor, Janet Yellen, too has indicated that monthly bond purchases would be trimmed.

The RBI does the majority of Indian investments in US treasury bonds even though other entities such as banks and financial institutions are allowed to invest in these bonds. India ranks 16th among foreign owners of the US government debt. “I think the RBI is looking at investing these dollars in a strong currency country and today, the USA is the best-performing economy,” said Madan Sabnavis, chief economist, Care Ratings.

China is trying to “reduce its dependency on Treasuries”, Louis Kuijs, chief China economist at Royal Bank of Scotland Group, told Bloomberg Television in Hong Kong on Wednesday. “It’s hard for them to do that, because the US is still by far the most liquid market and it’s actually not so easy to find room for all those billions of dollars of Chinese reserves.”

Chinese holdings of US government debt rose 4% last year, the second annual gain after falling in 2011.