For four consecutive months, the RBI has been increasingly buying dollar bonds. In today’s article, let’s discuss why the RBI is buying Dollar Bonds at an increasing pace!
RBI and the Dollar Bonds:
For four consecutive months, the RBI has been increasingly buying dollar bonds. India’s investments in the US Treasury Securities increased by $9.2 billion in August to $221.2 billion! This number is the highest in 2 years!
India now stands 12th in terms of US Treasury holdings. Japan remains the topper, owning around $1.2 trillion in US Treasuries.
What’s the reason behind RBI’s move?
Broadly, there are two reasons for this move by the RBI.
First, the US Federal Reserve is increasing the Fed Rate to new highs. For context, a 2-year US Government Bond was fetching just 0.25% a year ago. Today, the same bond can earn you 4%. And the bond is entirely backed by the US Government. Also, the 10-year US Treasury yields have spiked by 263 basis points this calendar year.
Secondly, the dollar is soaring high, which is very well indicated by the dollar index, which measures the dollar’s value against other major currencies. The Dollar Index is up by more than 16% year-to-date.
In a nutshell, the RBI wants to have a twin benefit of increasing returns on the US Treasury Securities that are default-free, along with investing in a currency growing in value!
What’s the future outlook?
As the US Federal Reserve continues to battle inflation, benchmark bond yields have been rising this year. Also, any surprise rate hikes by the US Central Bank could further increase bond yields. This could lead to the RBI and other Central Banks on a US Treasury buying spree!
Meanwhile, macroeconomic uncertainty and high energy prices in the UK pose additional threats to the World Economy!