The Reserve Bank of India (RBI) has been steadily reducing its investments in US Treasury securities as part of a broader strategy to diversify its foreign exchange reserves, with holdings dropping to $227.4 billion in June 2025 from $242 billion a year earlier. This move, which includes boosting gold reserves, comes amid escalating US-India trade tensions under President Donald Trump's administration, which has imposed 50% tariffs on Indian exports, potentially prompting further reductions in US debt holdings to mitigate risks.
Understanding US Treasury Bills and RBI's Holdings
US Treasury bills (T-bills) are short-term debt obligations issued by the US Department of the Treasury to finance government spending, with maturities ranging from a few days to 52 weeks. They are sold at a discount to face value and mature at par, providing a safe, low-yield investment backed by the US government's full faith and credit. Globally, they are considered the benchmark for risk-free assets, attracting central banks like the RBI for parking foreign exchange reserves due to their liquidity and stability. As of June 2025, total foreign holdings of US Treasuries exceed $8 trillion, with major holders including Japan ($1.1 trillion), China ($750 billion), and the UK ($700 billion); India ranks among the top 20 with about 2.8% share. The RBI invests in T-bills as part of its $670 billion forex reserves (as of August 2025), which include foreign currency assets (80%), gold (10%), SDRs, and IMF reserves. These holdings help manage rupee volatility, fund imports (India's import bill: $650 billion in 2024), and provide a buffer against external shocks.
Reasons for RBI's Reduction in Holdings
The RBI's calibrated cut in US Treasury holdings—down 6% year-on-year to $227.4 billion in June 2025—reflects a strategic diversification amid rising geopolitical risks, including the Russia-Ukraine conflict and US-China trade wars. High US bond yields, driven by the Federal Reserve's interest rate hikes to combat inflation (peaking at 5.5% in 2025), have made T-bills less attractive due to potential capital losses if rates fall. Additionally, the strengthening US dollar has prompted RBI to shift towards gold, which saw purchases of over 30 tonnes in 2025, boosting reserves to 850 tonnes valued at $57 billion. This move hedges against dollar volatility and inflation, as gold prices surged 15% in 2025 amid global uncertainties. The reduction also reflects India's push for de-dollarization, aligning with BRICS nations' efforts to reduce reliance on US assets, though dollars still comprise 60% of global reserves.
Impact of Trump's Tariffs on India and RBI's Strategy
President Trump's tariffs, escalated to 50% on Indian exports in 2025 (including 25% for Russian oil imports), aim to curb trade deficits and penalize nations buying discounted Russian crude (India imported 40% of its oil from Russia in 2024, saving $5-7 billion annually). This could hit India's $78 billion exports to the US (15% of total exports), affecting sectors like pharmaceuticals ($10 billion), textiles ($9 billion), and gems ($8 billion), potentially reducing GDP growth by 0.5% and worsening unemployment (urban rate: 8.5% in 2025). The rupee may weaken to 85-87 per USD, prompting RBI interventions via forex sales. To counter, RBI may accelerate diversification into euros, yen, or emerging market bonds, while exporters seek rupee devaluation for competitiveness. However, RBI views the impact as short-lived, with India's growth at 6.5% supported by domestic demand and services exports ($300 billion in 2024). Broader context: US-India trade imbalance ($34 billion surplus for US in 2024) fuels tensions, but pacts like the Indo-Pacific Economic Framework offer mitigation. Globally, similar tariffs on China (60%) have shifted supply chains, benefiting India with $20 billion in redirected investments in 2024-25.
© 2025 Gaining Sun. All rights reserved.