RBI keeps forex funds away from in'tl banks

Responding swiftly to the global crisis that turned many of the foreign banks insolvent, the Reserve Bank of India has stopped putting any portion of its foreign exchange reserves into the deposits of international banks.

According to sources, the RBI stopped parking forex funds with foreign banks immediately after the collapse of the US investment bank, Lehman Brothers, in September 2008. Lehman's collapse triggered a worldwide economic crisis, leading to a number of banks seizing operations in 2008 and 2009 so far.

"We (RBI) used to invest in deposits of large overseas banks. In October 2009, we decided that in private commercial foreign banks we would not put reserves," a senior official said. Sources said this is a temporary measure and will be reviewed once the global economy and the banking system stabilise.

"Those funds have been diverted from these banks to US treasuries and other investments," the official said. Consequently, the country's investment in the US treasuries jumped to $38.8 billion in May 2009, as compared to $18.3 billion in October 2008. This is nearly a four-fold rise in investment in US treasuries as compared to $10.3 billion in May 2008.

Apart from investment by the RBI, this data also includes any purchase of US treasuries by General Insurance Corp of India, foreign branches/ subsidiaries of domestic banks and domestic mutual funds permitted to invest in foreign securities. The country's forex reserves stood at $271.24 billion as on August 7, as per the latest estimate released by the RBI last Friday.

In percentage terms, investment in US treasury amounted to almost 15% of the forex reserves in May 2009, as compared to a mere 3% in May 2008 when reserves were at $314.61 billion. The RBI, the custodian of the country's forex reserves, typically invests in risk-free and liquid products. India's investment in the US treasuries has steadily risen since October 2008.

China continued to be the biggest buyer of the US debt, with holdings worth $801.5 billion till May 2009, up from $684.1 billion in October 2008, followed by Japan with holdings of $677.2 billion in May 2009.

A record number of 77 US banks closed down in the aftermath of the financial crisis in 2009, up from 25 bank failures in 2008. Last Friday, the US shut down Colonial BancGroup Inc, a lender in real estate development - the biggest failure this year.

It also closed four other banks in Arizona, Nevada and Pennsylvania. Other notable bank failures included Seattle-based Washington Mutual Inc, California-based lender IndyMac Bank, Florida-based BankUnited FSB.