India Dumps Treasuries as Rupee Defense Drives Reserve Shift

India has reduced its holdings of long-term US Treasuries to $174 billion, a five-year low and 26% below the 2023 peak, as policymakers defend the rupee and diversify the nation’s reserves.

The shift has lowered Treasuries’ share of India’s foreign-exchange assets to roughly one-third, down from about 40% a year earlier, Reserve Bank of India data indicates.

The rebalancing includes greater allocations to gold and other alternatives, echoing moves by larger reserve holders such as China and Brazil.

Analysts say the recalibration reflects both market and geopolitical considerations, and there is little doubt that the news will strike an ominous chord with those who harbour concerns over the impact on the U.S. economy of President Donald Trump’s expansionist and tariff policies.

Win Thin, chief economist at Bank of Nassau 1982 Ltd., said India still has “room to lighten up” on Treasuries as some central banks reduce exposure to dollar-denominated assets to limit sanctions risk.

RBI officials did not comment on the decline, while Finance Minister Nirmala Sitharaman said in September that reserve diversification is a “very considered decision.”

The approach gained urgency after the US froze Russia’s reserves in 2022, a precedent that sharpened focus on financial vulnerabilities for countries with large dollar assets.

Tensions between Washington and New Delhi have added pressure. India’s continued purchases of Russian oil and the imposition of US tariffs reportedly as high as 50% on Indian exports have complicated trade talks.

Delays to a new pact have coincided with record lows for the rupee, prompting RBI intervention financed in part by Treasury sales to support the currency.

Broader doubts about the durability of US assets as the default reserve choice have also grown amid global tariff proposals and the expanding use of sanctions.

India’s holdings remain modest next to Japan’s roughly $1.2 trillion and China’s near $683 billion, but its selling feeds a larger debate about the role of US sovereign bonds in diversified portfolios.

Gold buying has accelerated. China and Brazil recently trimmed long-term Treasury exposure to the lowest since at least 2011 while adding bullion, and Poland approved purchases of another 150 tons this week.

Central banks are navigating a more complex reserve landscape in which the dollar still dominates but alternative assets are gaining traction.

There are potential brakes on India’s divestment. A steadier rupee would lessen the need for currency defense, and a finalized US-India trade deal could further reduce pressure on reserves.

“If the trade deal materializes, the need for aggressive currency defense could diminish,” said Krishna Bhimavarapu, Asia Pacific economist at State Street Investment Management.

Even so, many expect only stabilization, not a reversal. An OMFIF survey in November found most central banks still hold the dollar but nearly 60% plan to seek alternatives within two years.

“The trend is very much embedded at this point,” said Michael Brown, senior research strategist at Pepperstone. Any trade breakthrough, he added, is more likely to stop further cuts than to trigger “a mass buying spree.”