By Jatin Bavishi
Continuing to increase its exposure, India’s holdings of American government securities touched USD 145.1 billion at the end of September 2017, official data showed. Remaining the 11th largest holder of the US Treasury securities, India increased its holdings by little over USD 6 billion in September compared to August when the same stood at USD 138.9 billion. Neighbouring China topped the list with holdings worth USD 1.1808 trillion as of September end followed by Japan whose exposure stood at USD 1.096 trillion during the same period.
The charm around Treasuries
The appetite of countries holding US Securities have been increasing in the recent months. The US economy has been growing at a decent pace in the last few quarters, and this has infused confidence of investors in the securities. These securities, often called Treasuries, are short-term (less than 1 year) debt-instruments denominated in dollars which are purchased by Central Bank of respective countries. They are bought to maintain exchange rate as well as money supply. For example, when faced with possibilities of depreciation of domestic currency, Central Banks would sell these securities to prevent a free fall.
However, economies sometimes pursue it to maintain trade competitiveness. China, for example, has been openly buying them in a bid to prevent Yuan from appreciating. China, as we all know relies on producing cheap labour-intensive commodities, meant largely for exports. By purchasing US treasuries in large numbers, the exchange rate of China is kept low, ensuring Chinese products are available to the Americans cheaply. Such currency manipulations often invite the ire of politicians who see it as a loss of competitiveness of domestically produced goods.
Why does USA relent?
An important question in this regard would be why does US put in place regulations to stop other countries from buying their securities? The answer to this is quite simple. Excess demand for these instruments would reduce the rate of interest that the US Government has to pay to the bondholders. In other words, US can finance its budget deficits at lower costs. In fact, US has for a long time running massive deficits, with its debt levels now higher than its GDP, which is sustainable only because of Treasury buying.
How India benefits?
Having a substantial quantum of Treasuries is of benefit to India, especially given its reliance on oil imports. After plummeting for 3 years, oil prices are slowly rising, which could hurt the currency. Treasuries act as a cushion to prevent short-term capital flight. Moreover, it comes at a fortunate time when the US administration is flexing its trade and investment policies and the Federal Reserve hinting at likely increase in its rates. The silos will act as a buffer to prevent any slippages arising out of these accounts.
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