India bets on gold: RBI cutbacks in US treasury bills signal diversification push

India’s central bank is reshaping its foreign exchange reserve strategy by reducing exposure to US Treasury bills (USTs) while simultaneously increasing gold holdings. Recent data from the Reserve Bank of India (RBI) and the US Department of Treasury highlights this shift, highlighting a broader global effort to diversify away from the dollar-dominated system.

According to a report in The Economic Times, India’s holdings of US Treasuries fell to $227 billion in June 2025, down from $242 billion a year earlier. Despite this reduction, New Delhi remains among the world’s top 20 investors in American debt, ahead of Saudi Arabia and Germany. Nearly all of these holdings form part of India’s $690 billion foreign exchange reserves, which remain robust even with reduced reliance on dollar assets, Business Standard said in a report.

Gold gains in prominence

Parallel to its reduced Treasury holdings, India has significantly ramped up its purchases of gold. The RBI added 39.22 metric tonnes over the past year, taking its stockpile to 879.98 metric tonnes by late June 2025, compared with 840.76 metric tonnes a year earlier. This marks one of the largest year-on-year expansions in recent times and reflects India’s preference for gold as a more stable reserve asset.

Gold’s appeal lies in its ability to hedge against currency fluctuations and preserve value during economic uncertainty. Over the past two years, the dollar has lost about 40 per cent of its value in terms of gold, weakening its traditional role as the world’s most trusted reserve currency. Against this backdrop, India’s tilt towards bullion shows a defensive strategy aimed at mitigating risks associated with US fiscal pressures and dollar volatility.

Global trend of diversification

India’s moves are not in isolation. China, the third-largest holder of US Treasuries after Japan and the UK, has also trimmed its exposure. Beijing’s holdings fell to $756 billion in June 2025, from $780 billion the previous year. This pattern indicates a shared caution among emerging economies about overreliance on the dollar at a time of heightened geopolitical tensions and fiscal strain in Washington.

Interestingly, while India and China are reducing their stakes, some countries such as Israel are increasing their Treasury holdings. The divergence points to differing national strategies: some see US debt as a liquid and safe option, while others prioritise insulation from dollar-specific risks, the Business Standard said.

Risk management and geopolitical concerns

Economists argue that India’s recalibration is driven by a desire to derisk its reserve composition. A fall in UST yields typically attracts investors, yet India pared back holdings despite this, suggesting that long-term risk management outweighed short-term returns, The Economic Times said. Concerns about the US government’s worsening fiscal metrics, elevated bond yields and global trade frictions have only reinforced the case for diversification.

By leaning more heavily on gold, India is positioning its reserves to withstand shocks tied to US economic or political developments. This strategic hedging is particularly relevant in the context of volatile global markets and an uncertain geopolitical environment.

Balancing act for the RBI

While the RBI’s pivot signals a diversification push, India continues to maintain a strong dollar buffer. With $227 billion in Treasuries still on its books and total forex reserves nearing $690 billion, the country remains well-positioned to handle currency market fluctuations and external shocks. The strategy, therefore, is not about abandoning US assets but about recalibrating the mix to reduce vulnerability.

The balance between liquidity, stability and safety remains the guiding principle of reserve management. Gold, despite offering no yield, has gained renewed importance as a long-term anchor in this balancing act.

India’s diversification of reserves reflects both prudence and adaptation. As global economic realignments accelerate, the reliance on the US dollar appears increasingly fraught with risks. For New Delhi, building up gold holdings is not merely a symbolic gesture but a structural shift designed to safeguard economic stability.

If current trends continue, India’s forex composition may see a gradual but steady increase in gold’s share alongside a reduced dependence on dollar-denominated debt instruments. This approach aligns with global shifts in reserve management and underscores the evolving dynamics of international finance.