Why Did India Suddenly Buy US Treasuries on a Large Scale? July Net Purchases Hit a Record $15.2 Billion, with a Special Swap Mechanism Playing a Key Role

Thanks to large capital inflows under the Indian central bank's special arrangement to attract overseas capital, India bought a record scale of US Treasuries in July. The latest data from the US Treasury Department shows that India's net purchases of US Treasuries jumped from $3.39 billion in June to $15.2 billion in July, with holdings rising to their highest level in 10 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 RBI offers preferential swaps for funds raised through diaspora deposits and overseas borrowing. The inflows exceeded expectations, pushing India's foreign exchange reserves to a record high. Vivek Rajpal, Asia strategist at JB Drax Honore in Singapore, said that because the swap operations create dollar-denominated liabilities for the RBI, the central bank will invest the funds in dollar assets. Rajpal said that investing part of the funds in US Treasuries allows the RBI to earn carry returns, helping offset the costs of the related measures. Given that India's foreign exchange reserves continued to rise in August and total inflows under the RBI's mechanism surged to $136 billion, he expects the scale of India's purchases of US Treasuries to remain high.