Why did India suddenly make massive purchases of US Treasuries? July net purchase hit a record $15.2 billion, with a special swap mechanism as the key factor

Zhitong Finance APP has learned that, thanks to a special arrangement by the Reserve Bank of India to attract overseas capital and a large inflow of funds under this scheme, India made a record purchase of US Treasuries in July. The latest data from the US Treasury Department shows that India's net purchase of US Treasuries in July jumped from $3.39 billion in June to $15.2 billion, pushing its holdings to the highest level in ten months.

Previously, under the special window mechanism announced by the Reserve Bank of India in early June, capital inflows reached $40.8 billion by the end of July. The central bank offered preferential swaps for funds raised through remittance deposits and overseas borrowing. The inflows exceeded expectations and pushed India's foreign exchange reserves to a record high.

Vivek Rajpal, Asian strategist at Singapore’s JB Drax Honore, said that since the swap operations bring US dollar-denominated liabilities to the Reserve Bank of India, the central bank invests these funds in dollar assets.

Rajpal stated that allocating part of the funds to US Treasuries allows the Reserve Bank of India to earn holding returns, helping to offset the costs associated with these measures. Given that India’s foreign exchange reserves continued to rise in August, and the total inflow under the Reserve Bank of India's mechanism surged to $136 billion, he expects that India’s purchase of US Treasuries will remain at a high level.