India cuts US debt exposure by $4.2 bn in 3 months

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India has lowered its exposure to America's ballooning debt for three consecutive months, as its holding of the US Treasury bonds fell by USD 4.2 billion (more than Rs 20,000 crore) between May and July this year.

As per the latest foreign holding data released by the US Treasury Department, Indian holding of the US Treasury bonds -- debt securities issued by the world's largest economy -- fell by USD 1 billion in July to USD 37.9 billion.

It was the third consecutive month of decline since May, and the longest declining streak since 2010.

At the end of April 2011, India held treasury bonds worth USD 42.1 billion -- close to its record high holding of USD 42.2 billion in June 2009.

The Indian holding declined for three months even before the first-ever sovereign rating downgrade of the US in August. The data for the last month would be released on October 18.

It was widely feared that many of the US treasury investors, including foreign entities, would have cut their holdings after the downgrade by credit ratings agency S&P. It had cited reasons like inadequate steps by the US to contain ballooning debt for taking the historic action.

The total debt of the US is moving close to USD 15 trillion, out of which it owes nearly USD 4.5 trillion to foreign countries that hold US Treasury bonds.

The 3-month decline in the US debt holding by India also happens to be the third longest streak of fall, after the 6-month period of July-December in 2009 and a 5-month decline from January to May of 2008.

Indian holding has fallen to a level last seen in August 2010 (USD 37.9 billion). In contrast, a number of other countries including China, the largest foreign holder of the US treasury bonds, raised their exposure in July, as also in previous few months.

However, Indian exposure to the US debt remains higher than countries such as South Korea, Italy, Netherlands, France, Sweden and Australia.

India is ranked as 15th largest foreign holder of the US debt securities after China, Japan, UK, Brazil, Taiwan, Hong Kong, Switzerland, Russia, Canada, Thailand, Singapore, Luxembourg, Germany and Turkey.

In India, the US treasury bonds are mostly held by the Reserve Bank, while some financial institutions and foreign branches of Indian banks also hold some of these securities.

RBI holds the US treasury securities as part of its foreign exchange reserves portfolio. Some experts pointed out that India had been increasing its exposure till a few months ago on the pretext that the US debt bonds were one of the most secure from default risks.

They said that the subsequent decline for three months could be due to some profit-booking by Indian entities, as also because of churning in their portfolio as any impact of the US credit ratings downgrade would be visible only from August onwards.

While an exposure of USD 37.9 billion is a substantial figure from Indian context, this accounts for less than 0.3 per cent of America's total debt and below 1 per cent of its total foreign debts.

In fact, the Indian exposure is lower than an estimated USD 40 billion worth treasury bonds held by one single entity, Warren Buffett-led Berkshire Hathaway.

The overall foreign holding of the US government securities has grown by over USD 200 billion in past one year, while China has increased its exposure by about USD 50 billion during this period.

Releasing the July figures, the US Treasury Department said that the foreign residents overall increased their holdings of long-term US securities in July with net purchases of USD 24.6 billion.

The net purchases by private foreign investors were USD 10.4 billion, and net purchases by foreign official institutions were USD 14.2 billion.

At the same time, the US residents increased their holdings of long-term foreign securities, with net purchases of USD 15.1 billion.