The Reserve Bank of India’s holdings of US Treasury bonds have fallen to a five-year low as India pushes to support rupee versus the US dollar and diversify its forex reserves, joining a broader shift by some major economies out of the world’s biggest bond market.
RBI’s holdings of long-term US bonds have dropped to $174 billion, down 26% from a 2023 peak, according to US government data made available last week. US Treasury bonds now account for one-third of India’s forex assets, according to RBI data, compared with 40% a year prior.
As gold and other alternatives take a larger share of RBI’s forex reserves, the shift mirrors moves by bigger holders like China, reviving questions about US exceptionalism and the role of its debt as a reserve asset. Renewed trade threats from President Donald Trump over Greenland are only deepening the unease, raising the prospect that European governments could also start scaling back.
Much of this shift likely reflects a move away from dollar assets to mitigate sanctions risks, said Win Thin, chief economist at Bank of Nassau 1982 Ltd. with nearly four decades of market experience. “There is still room for India to lighten up its US Treasury holdings.”
RBI did not respond to a request for comment on the decline in holdings of US government bonds. Finance Minister Nirmala Sitharaman said in September that RBI was taking a “very considered decision” to diversify its reserves.
Rupee vs Dollar
For Mumbai and others, the lessons come after the US froze Russia’s forex reserves following its February 2022 invasion of Ukraine. India’s continued buying of Russian oil since became a point of contention with US President Donald Trump, contributing to high tariffs on the Asian nation.
“The speed at which relations between the United States and India deteriorated last year would have taken many by surprise and jolted policymakers to reduce their vulnerabilities,” said Shilan Shah of Capital Economics, the top rupee forecaster last quarter, according to Bloomberg rankings.
Part of the calculus stems from RBI’s efforts to defend India’s battered rupee. It has fallen to record lows on delays to an India-US trade deal after Washington’s 50% tariffs on Indian exports—the steepest in Asia. By selling US Treasury holdings, RBI can then use the funding to purchase rupees to strengthen its value.
The weaponisation of US dollar
Among investment circles, Trump’s global trade tariffs and the weaponisation of the dollar through sanctions has raised questions over whether US Treasury bonds remain the best bet. The recent raid on Venezuela is only adding to those doubts.
The RBI isn’t a major holder of US bonds, owning only one-quarter of China’s nearly $683 billion holdings and Japan’s $1.2-trillion book, according to data through November. And foreign ownership of US Treasuries remains near an all-time high. Still, the selling adds to the debate over the role of US sovereign bonds in global portfolios.
Central banks worldwide are now having to navigate an increasingly complex policy landscape which places more pressure on reserve allocation. While the dollar, and by extension US Treasuries, remain pre-eminent global reserve assets, the search for alternatives is undoubtedly gaining traction.
Gold > US Treasury
The RBI’s selling comes as the central bank hikes its gold-buying streak. China and Brazil cut their long-term US Treasury holdings in October to the lowest level on record since at least 2011, with the former ramping up on bullion.
Just this week, the National Bank of Poland, the world’s biggest reported gold buyer, approved plans to purchase another 150 tons of the precious metal.
There are reasons why India’s selling could taper, a steadier rupee for instance, or a reduction in tensions if the stalled trade deal is eventually finalised.
“If the trade deal materialises, the need for aggressive currency defence could diminish,” said Krishna Bhimavarapu, Asia Pacific economist at State Street Investment Management.
Yet a growing number of market watchers say that a shift to other assets is coming. A November survey by think tank OMFIF found a vast majority of central banks still hold the greenback, but nearly 60% planned to look for alternatives in the next one to two years.
“The trend is very much embedded at this point,” Michael Brown, a senior research strategist at Pepperstone in London, said of India selling Treasuries. A trade agreement “will simply see holdings stabilise, rather than India go on some sort of mass buying spree”.
