Treasury Bills (T-bills): RBI Cuts Holdings in US Treasury Securities

Foreign exchange reserves are more than just big numbers in bank books. What a country does with them, whether it holds them in US Treasuries, gold, or other assets, says a lot about how it sees global risk, geopolitics, and its own financial safety. 

Recently, India has increased its gold holdings and somewhat reduced its exposure to US Treasury securities. This shift appears deliberate, connected to global trade tensions, fears of sanctions, and concern about over-reliance on US dollar-denominated assets. 

In this article we’ll explore what T-bills are, why RBI invests in US Treasuries, what happens if the US imposes sanctions, what India’s current reserve composition looks like, and what this all implies going forward.

What Are Treasury Bills?

Treasury Bills (often called T-bills) are short-term government securities issued by a sovereign (like the US Treasury) with a maturity typically less than one year, often 4 weeks, 13 weeks, 26 weeks (6 months) or 52 weeks (1 year). They are zero-coupon instruments, which means they are sold at a discount to their face (par) value and redeemed at par when they mature.

Imagine you lend a friend ₹95 today, with the promise that in 3 months they’ll pay back ₹100. There is no periodic interest payment; the “interest” is the difference (₹5) earned when they repay you the full ₹100. 

That’s more or less how a T-bill works: you buy it cheaper now, you get more later when it matures.

Some additional metrics and details:

• Maturity periods: Vary depending on the issuing government. In the US, 4-week, 8-week, 13-week, 26-week, 52-week etc.
   
• Issued at discount: You pay less than face value; there is no coupon interest. The yield comes from the difference between purchase price and redemption price.
   
• Redemption / Yield: At maturity, you receive the face value. The yield (return) depends on how large the discount was, which in turn depends on demand, macroeconomic interest rate environment, inflation expectations, and risk perceptions.

Why T-bills are considered “safe” in many contexts:

• Issued by very credit‐worthy sovereigns (like the US), so default risk is very low.
   
• Highly liquid markets. You can buy, sell, or trade them relatively easily.
   
• Short duration: lower interest rate / inflation risk relative to longer‐dated bonds.

However, there are trade-offs:

• Low yields, especially in low interest rate environments (or when inflation is high).
   
• Currency risk: if your domestic currency shifts, even a “safe” T-bill may lose value in local currency terms.
   
• Sovereign risk only covers default risk, but there is also risk of policy change, sanctions, or market access restrictions.

Why Do RBI’s Foreign Reserves Need to Invest in US Treasuries?

India’s foreign exchange reserves serve multiple purposes. Some of the reasons that RBI has historically invested in US Treasury securities (including T-bills, bonds, and other treasuries) are:

1. Safety & Liquidity
   US Treasuries are among the safest liquid assets globally. When you need to convert reserves quickly (for example, to defend the rupee, pay for imports, meet external debt obligations), you want assets that can be sold or pledged quickly without big losses. T-bills especially aid liquidity because of short maturities.
    
2. Preservation of Value
   The US dollar is the world’s primary reserve currency. Many global trade contracts, commodity transactions (like oil), and external debts are denominated in dollars. Holding dollar‐denominated assets helps hedge or at least align with those needs.
    
3. Yield Considerations vs Safety
   Longer-term US Treasuries, or even short US Treasuries, often provide more stable returns than many alternatives, adjusting for risk. Even if the yield is modest, compared to less liquid or riskier assets, it’s an acceptable trade‐off.
    
4. Balance of Payments / External Shock Cushion
   In economic crises, capital flight, sudden stops in inflows, forex volatility, reserves serve as a buffer. High quality assets like US Treasury securities strengthen credibility (for investors, rating agencies) that the country can meet obligations.
    
5. Regulatory & Global Financial Architecture
   Many global financial and banking rules, credit rating considerations, trade finance norms favor assets denominated in major currencies and held in safe instruments. Maintaining US Treasuries aids interoperability with international settlement, SWIFT, USD flows.
    
6. Cost of Alternatives
   Alternatives like gold have no yield (they don’t pay periodic interest), and holding them has storage, insurance, purity, and liquidity costs. Other sovereign bonds (non-US) may have higher credit risk, lower liquidity, or currency risk. So there is a trade-off: a mix between yield, risk, liquidity, and geopolitical risk.
    
7. Geopolitical Signalling and Relationships
   Holding US Treasuries may have implicitly political or strategic value—maintaining exposure (or visibility) vis-à-vis major global powers. However, such benefits have to be weighed against risk of sanctions, foreign policy changes.

So, while investing in US Treasuries is not without cost or risk, historically it has been rational for RBI (and many central banks) to hold substantial amounts in them.

What Happens to US Treasuries If the US Imposes Sanctions on a Country?

If a country is sanctioned by the US (or if the US enforces measures that affect foreign holders of US Treasuries), several possible scenarios could occur, with varying severity and probability depending on the nature of the sanctions, the country involved, and its exposure.

Here are potential risks:

1. Freezing / Blocking Access
   The US Treasury could freeze “foreign official holdings” if they are held in US-based custodians, or block transactions. This has precedent: Russia’s foreign reserves were effectively cut off after sanctions following its invasion of Ukraine. If holdings are held abroad (in US or other jurisdictions), access may be restricted.
    
2. Liquidity Risk
   Even if not outright blocked, trading US Treasuries from abroad may become more difficult (due to counterparty risk, market restrictions, or due to other countries avoiding dealings). Selling large amounts quickly may incur losses, especially if markets anticipate trouble.
    
3. Price Risk / Yield Risk
   The uncertainty may raise yields sharply (fall in price) for US Treasuries, especially if holders are forced to sell or if global investors view them as risky. If the dollar weakens or inflation expectation rises, these assets may lose value in real terms.
    
4. Reputation / Credit Risk Spillovers
   Being subject to sanctions can affect how other assets are treated, how trading relationships function, and perhaps lead to broader financial isolation. For example, other countries might avoid doing USD-denominated business with a sanctioned country, increasing costs or creating risk premia.
    
5. Risk of Devaluation (Currency Risk)
   Even if the US doesn’t sanction the securities per se, changes in US fiscal policy, treasury issuance, inflation, or interest rate policy may reduce the attractiveness (real yields) of US securities. If inflation in the US is high, or if the US dollar weakens, the value of dollar-denominated reserves falls in domestic currency terms.
    
6. Operational / Custodial Risks
   Securities might be held via custodians or in foreign jurisdictions. There is risk in terms of regulation and jurisdiction. Who has actual title, where is the security, and what laws govern it? In case of sanctions, these legal/contractual custodial arrangements may become complex.

What India is doing (reducing US Treasury exposure, increasing gold) seems to be a response to many of these risks, anticipation of geopolitical volatility, possible sanctions risk (explicit or implicit), desire to reduce systemic exposure.

What Is the Current Composition of India’s Forex Reserves?

Here we examine how India’s reserve composition is changing: how much is in US Treasuries (especially T-bills), how much is in gold, what’s the total size, and recent trends.

Below is a table summarizing recent values and trends:

Key Figures in India’s Forex Reserves (US Treasury Holdings vs Gold vs Total Reserves)

Here are some recent data points (as of mid-2024 vs mid-2025) for India’s foreign exchange reserves, gold reserves, and US Treasury holdings:
 

After seeing the table, we can note:

• India’s holding in US Treasuries dropped by roughly US$14-15 billion year-on-year (from US$242B to US$227.4B).
   
• At the same time, gold holdings in metric tonnes increased by 39-40 tonnes year-on-year (from 840.76 to 880) reflecting an increase in the gold component of reserves.
   
• Total reserves remain large (US$690-700B), so while the relative share of US Treasuries is declining somewhat, the absolute number is still sizeable. The share shift reflects diversification, not abandonment.

Conclusion

India’s recent actions, cutting back a bit on its US Treasury holdings while increasing gold reserves, fit a global pattern of central banks seeking to diversify. This is driven by geopolitical tensions, concerns about over-reliance on the US dollar, risk of sanctions or foreign asset seizure, inflation, and more volatile global financial conditions.

Although US Treasuries remain a major component of India’s forex reserves, the reduction is modest but meaningful. It signals a cautious rebalancing rather than a sudden pivot away. Gold, while non-yielding, offers perceived safety, less counterparty risk, and traditionally performs well in times of global uncertainty.

Going forward, what will matter is how India manages the trade-offs: liquidity vs return vs risk, how its investments are structured (custody, currency, duration), and how external pressures (tariffs, sanctions, global interest rate changes) evolve. Also, whether other reserve assets (non-USD securities, SDRs, foreign sovereign bonds, etc.) play a bigger role will be important.

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