A dedicated mechanism introduced by the Reserve Bank of India to attract foreign capital led to a record surge in the country’s purchases of US Treasuries during July. Fresh data from the US Treasury Department shows India’s net buying of American government debt jumped to $15.2 billion, a sharp rise from the $3.39 billion recorded in June, which pushed its total holdings to the highest level seen in ten months.
This surge follows a specialised channel launched by the Indian central bank in early June, which had accumulated $40.8 billion in total inflows by the end of July. The programme offers favourable swap arrangements for funds raised through overseas diaspora deposits and external borrowings, effectively enabling India to boost its dollar asset accumulation significantly.
The scale of incoming capital has exceeded expectations, helping lift India’s foreign exchange reserves to unprecedented highs. Because the swap facility creates dollar-denominated liabilities for the central bank, it opts to park these funds in US dollar assets, according to Vivek Rajpal, Asia strategist at Singapore-based JB Drax Honore.
Rajpal noted that channelling part of the dollar inflows into Treasuries allows the central bank to earn a yield spread, which helps offset the costs associated with the policy. He expects India’s Treasury purchases to remain robust, as foreign reserves kept climbing in August and total inflows through the central bank’s special mechanism have already ballooned to $136 billion.
Comments