RBI Reduces U.S. Treasury Holdings by 3.3% Amid Tariff Tensions

In the months leading up to the imposition of punitive tariffs by Donald Trump on India, the Reserve Bank of India (RBI) had already initiated a strategic shift in its reserve management. The RBI gradually reduced its holdings of U.S. Treasury securities while increasing its gold reserves, signaling a move away from reliance on U.S. debt as a safe-haven asset and towards a more diversified reserve portfolio.

The latest data from the U.S. Treasury Department indicated that India's holdings of U.S. Treasury securities decreased from 235.3 billion dollars in May to 227.4 billion dollars in June. This reduction was part of a broader trend, as India's holdings had also declined from approximately 242 billion dollars in the same period the previous year. Concurrently, the RBI's gold reserves saw an increase during this period.

The Finance Minister of India highlighted that the RBI's decisions regarding reserve diversification were carefully considered. As of the latest data, India's foreign exchange reserves stood at approximately 694 billion dollars, making it the fourth-largest reserve holder globally. This strategic move comes at a time when global economic uncertainties are rising, prompting central banks worldwide to bolster their gold holdings to mitigate risks associated with the U.S. dollar.

The geopolitical tensions, particularly the freezing of Russian foreign exchange reserves by the U.S. following the 2022 Russia-Ukraine conflict, have influenced central banks' decisions. There is a growing consensus that if the U.S. can freeze Russian assets, similar actions could be taken against any other country. This has led to a push for reserve diversification among central banks.

The RBI's actions are also a response to the escalating tensions between the U.S. and India. Since August, when Trump imposed a 50% tariff on Indian goods exported to the U.S., the highest rate among Asian countries, relations between the two nations have become strained. The tariffs included a 25% penalty on India's purchase of Russian oil, which the U.S. Treasury Secretary has criticized as supporting Russian military actions.

Data from the RBI shows that by July, the central bank's gold reserves had increased from 841.5 tons the previous year to approximately 880 tons. Additionally, the RBI has been repatriating more of its gold reserves back to India. The latest figures indicate that the domestic gold holdings have risen from 292 tons in September 2020 to 512 tons.

The RBI's former Deputy Governor, who was involved in the decision-making process for gold purchases during his tenure, noted that central banks are concerned about the ability to access gold reserves stored abroad in times of crisis or sanctions. The repatriation of gold reserves is seen as a strategic move to enhance reserve diversification and reduce dependence on the U.S. dollar.