A Quiet Shift With Loud Implications: Why India Cut US Treasury Holdings Despite Attractive Yields
India has made a subtle yet significant move in its foreign exchange reserve strategy—one that markets and policymakers are now beginning to decode. Despite relatively attractive yields in the US bond market, India reduced its exposure to US Treasury notes by 21 percent in 2025, marking the first annual decline in four years. The shift signals a broader reassessment of reserve allocation at a time when global economic, geopolitical, and currency dynamics are rapidly evolving.
India’s US Treasury Holdings Fall 21%, Breaking a Four-Year Trend
According to Bloomberg data, India’s holdings of US Treasury notes declined sharply to $190.7 billion as of October 31, 2025, from $241.4 billion a year earlier. This reversal stands out because it comes after four years during which India’s investments in US Treasuries had either risen or remained broadly stable.
The reduction is notable not just for its size, but for its timing. During the same period, the yield on the benchmark 10-year US Treasury traded in a relatively attractive range of 4.0–4.8 percent, levels that would typically support sustained foreign demand from large reserve-holding nations like India.
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Why Yields Were Not the Deciding Factor This Time
Economists argue that the drawdown was driven less by yield considerations and more by strategic intent. While higher yields usually make US Treasuries appealing, the broader macro backdrop appears to have shifted the calculus for reserve managers.
Dipanwita Mazumdar, Economist at Bank of Baroda, said the move reflects a conscious pivot in strategy.
“This points to India’s approach towards diversification and marks a shift in its forex strategy,” she noted.
She added that the reduced exposure also indicates lower dependence on the US dollar, particularly at a time when the dollar index has shown a softening bias amid signs of a cooling US labour market.
Softer Dollar and Fed Easing Expectations Reshape Reserve Strategy
Another key factor influencing the shift is the evolving outlook for the US economy and monetary policy. Expectations of an eventual easing cycle by the US Federal Reserve have reduced the appeal of adding long-duration dollar assets at current levels.
A softer dollar outlook means potential currency gains from holding US Treasuries may be limited, even if yields remain elevated. For reserve managers focused on preserving value over long horizons, this changes the risk-reward equation.
At the same time, global trade fragmentation, geopolitical tensions, and shifting alliances are prompting central banks worldwide to reassess concentration risks in dollar-denominated assets.
Gold and Non-Dollar Assets Regain Prominence
Market participants believe India is reallocating a portion of its reserves into alternative assets and currencies, including gold, other sovereign bonds, and non-dollar instruments. Gold, in particular, has regained prominence globally as a reserve asset due to its role as a hedge against:
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Currency volatility
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Inflation risks
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Geopolitical shocks
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Financial market stress
“In the current volatile global political landscape, we may again see higher gold holdings by the RBI,” Mazumdar said, noting that such a move would align with a broader global trend of central banks increasing gold reserves.
The Reserve Bank of India has, over recent years, gradually increased its gold holdings, reflecting a desire to balance safety, liquidity, and long-term returns.
Here’s What Happened Today and Why Traders Reacted
While the data relates to reserve trends over a year, markets reacted cautiously as the implications sank in. The information reinforced existing concerns around global capital flows, dollar strength, and emerging market positioning.
Key reactions seen today included:
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Heightened attention on currency and bond markets
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Continued caution in equities amid global uncertainty
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Renewed interest in gold-linked assets
A currency strategist said, “This isn’t a panic move by India—it’s a signal. But markets read signals closely, especially when they point to de-dollarisation at the margin.”
Impact on Markets in the Coming Days
In the near term, the shift is unlikely to trigger sharp moves in Indian equities or bonds on its own. However, it adds to a broader narrative of global reserve diversification, which could have longer-term implications for currency markets and capital flows.
For India, reduced reliance on US Treasuries may:
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Provide greater flexibility in managing external shocks
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Reduce exposure to dollar-specific volatility
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Strengthen the role of alternative reserve assets
For global markets, such moves—if replicated by other emerging economies—could gradually influence demand dynamics in the US bond market.
What This Means for Traders and Investor Portfolios
For traders, the development underscores the importance of tracking macro and currency trends alongside domestic fundamentals. Currency-sensitive sectors and assets may remain volatile as reserve strategies evolve globally.
For long-term investors, the message is more strategic than tactical. A gradual shift away from concentrated dollar exposure by central banks reinforces the case for diversification across asset classes, including selective exposure to gold and global assets.
Portfolio advisors suggest that while the US dollar will remain the dominant reserve currency, incremental shifts like India’s highlight the need to prepare for a more multipolar financial system.
A Calibrated Move, Not a Retreat From the Dollar
Experts are clear that India’s action does not signal an exit from US assets. Instead, it reflects a more calibrated and diversified approach to managing external buffers in an increasingly uncertain world.
As one economist summed it up, “The dollar isn’t losing its crown—but it’s no longer the only pillar.”
India’s reserve strategy, it appears, is evolving quietly—but with long-term implications that markets cannot afford to ignore.
