Explainer | India’s US treasury holdings fell 3.9% to $212.6 bn in Sep: 5 questions answered

India's trove of US treasury securities fell 3.9 percent on-month to $212.6 billion in September, per data made available in the Securities and Exchange Board of India (SEBI) monthly bulletin. On a year-on-year basis, India's US bond holdings have fallen 2.7 per cent. This is the second consecutive month India's stockpile of US bond holdings have declined.

With 15.4 percent of the total foreign holdings, Japan was the biggest foreign holder of US treasury securities at the end of September 2022, followed by China with 12.8 percent. The total foreign holding of US securities at the end of September was $7,296.9 billion, 2.9 percent of which was held by India.

Five key points:

Why have the holdings fallen?

Despite the rise in US treasury yields between August and September, India's holdings in these securities fell by about 3.9 per cent on-month in September due to regular treasury operations by the Reserve Bank of India (RBI), dealers said.

"The fall and rise of US treasury holdings is because of exchange rate and mark-to-market (MTM) operations," said Ajay Manglunia, MD and Head of Investment, JM Financial.

Typically, when interest rates rise sharply in the US, major economies including India start cutting their holding in these assets due to potential MTM (mark-to-market) losses as also currency risk.

Usually, when interest rates rise, bond prices fall and yields rise to align with the higher interest rates. This drop in bond prices triggers MTM losses with banks valuing their bond portfolio at market prices. (added, please see)

Is this significant for India?

RBI’s US treasury operations are not too significant for Indian investors as it doesn’t impact the Indian bond market.

The Indian bond market is typically influenced by the rate decisions of the RBI, local inflation numbers, crude oil prices, and other macroeconomic developments.

"We should not be too worried about it. So long as the forex reserves are stable or rising, India is in a sweet spot," Manglunia added.

How does a strengthening Dollar impact India?

With respect to US treasury holdings, a strengthening Dollar is a positive factor as the RBI earns better returns, dealers said.

"A rising Dollar means better returns for the RBI from US treasury holdings, despite a rise in interest rates," said Anil Kumar Bhansali, Head of Treasury, Finrex Treasury Advisors.

Will this trend continue?

"In the coming months we may see a further cut in holdings due to increase in yields," a dealer said.

Between August and September, the 10-year US treasury yield has risen more than 50 basis points (bps). A basis point is one-hundredth of a percent.

Which countries have high holdings of US securities?

Per SEBI data, Japan has the highest holdings of $1,120.2 billion, followed by China ($933.6 billion), United Kingdom ($663.3 billion) and Belgium ($325.1 billion).