Bangalore: Indian Banks’ dollar deposits with U.S. Banks fall in June, which reflects a tendency of risk aversion, reports C. Shivkumar of MyDigitalFC.com. This resulted a fall in custodial liabilities of U.S. banks to counter parties in India, which minimized by over $2 billion in June.

As per the U.S. treasury data, custodial liabilities payable in U.S. dollars in June was $13.059 billion, which was $15.288 billion a year ago. These liabilities included foreign currency deposits by Indian banks. They hold dollar deposits with U.S. counterparts for resolution of international liabilities.

Vikas Babu, Currency Trader of Andhra Bank said, “There is some risk aversion on U.S. banks. So, banks have shifted to short-term U.S. treasuries for less than one year for liquidity purposes”, as quoted by MyDigitalFC.com.

However the shift to U.S. treasuries was not essentially driven by interest earnings as short-term holdings in U.S. treasuries earned barely 0.5 percent. Correspondent account balances, which are basically current accounts, earned zero interest, but the shift was partially based on the fact that foreign institution balances in U.S. banks are not covered by the U.S. Federal Deposit Insurance Company (FDIC), an organization which provides insurance cover for bank deposits only to U.S. entities and residents.

This move to U.S. treasuries was also evident from a sharp rise in holdings from $9.5 billion to $50.8 billion by Indian institutions, including the RBI. The increase in holdings was regardless of compression in India’s external reserves by $26.5 billion in June from the corresponding period of 2011.

The U.S. treasury holdings by Indian banks were increased mostly in short-term dollar treasuries. Traders predict, the shift to U.S. treasuries was completely on account of the sovereign cover on these securities. The U.S. sovereign cover provides security of investments to the Indian institutions and banks.