India's holdings of US Treasury securities experienced a significant decline in 2025, falling by approximately 21% over the year to October 31, according to data compiled from Bloomberg. This marks the first annual reduction in four years, signaling a notable shift in the country's foreign exchange reserve management strategy.

Treasury Holdings Decline Despite Attractive Yields

The data reveals India's stock of US government bonds decreased substantially during the period under review:

This reduction occurred even as US bond yields remained appealing to foreign investors. The 10-year Treasury yield moved between 4% and 4.8% during the period, typically a range that supports foreign inflows and makes US debt securities attractive to international holders.

Strategic Reserve Diversification

Economists suggest the drop in Treasury holdings reflects a strategic rebalancing of India's foreign exchange reserves rather than being driven purely by returns on US bonds. This move aligns with broader efforts to diversify reserve assets amid evolving global economic and geopolitical uncertainties.

Dipanwita Mazumdar, an economist at Bank of Baroda, explained that the reduction signals India's intent to reduce reliance on dollar-denominated securities at a time when the US dollar index has shown signs of softening bias. She noted that this points to India's approach towards diversification and marks a shift in its forex strategy.

Factors Driving the Strategic Shift

Several key factors appear to be influencing India's reserve allocation strategy:

• A weaker dollar outlook and expectations of eventual US Federal Reserve rate cuts
• Reduced attractiveness of long-duration dollar assets
• Rising geopolitical risks and fragmentation in global trade and finance
• Need for enhanced portfolio diversification

These developments have prompted central banks, including the Reserve Bank of India, to review their reserve allocations and adopt more diversified approaches to reserve management.

Alternative Reserve Assets Gaining Favor

Market participants believe India is shifting part of its reserves toward alternative assets, including gold, non-dollar currencies, and other sovereign bonds. Gold has regained favor as a hedge against currency swings, inflation, and geopolitical uncertainty.

Mazumdar indicated that in the current volatile global political landscape, higher gold holdings by the RBI may be expected, adding that such a move would align with the broader global trend of central banks increasing their gold reserves.

Broader Global Trend

India's changing reserve strategy mirrors a wider shift among emerging markets toward balancing safety, liquidity, and returns while reducing over-reliance on dollar assets. Even as the US dollar remains the dominant reserve currency, India's actions signal a more measured and diversified approach to reserve management in response to evolving global economic conditions.

As the Q3 results season begins, India Inc is positioned to report its strongest earnings growth in two years, with Motilal Oswal expecting 16% year-on-year profit growth for companies within its coverage universe. However, the earnings recovery story remains uneven across sectors, with several companies facing significant headwinds.

Sector-wise Performance Outlook

While the overall earnings picture appears positive, solid recovery may remain elusive for exporters, chemicals, pharma, IT, BFSI, FMCG and EMS sectors. Analysis by Nuvama, Kotak Institutional Equities, and Motilal Oswal reveals at least nine companies are likely to report profit declines of 50% or more year-on-year in the October-December quarter.

Banking Sector Challenges

IndusInd Bank is expected to witness the steepest decline among the identified companies:

The private sector lender continues to grapple with asset quality pressures and provisions that have weighed heavily on its bottom line.

Chemical and Textile Sector Stress

PI Industries faces significant challenges in the specialty chemicals space, with profit expected to decline between 69% and 80% year-on-year. The agrochemicals major is experiencing headwinds from weak pricing in key molecules, particularly following profit warnings from its Japanese partner Kumiai Chemicals regarding Pyroxasulfone, one of its flagship products.

The textile sector shows severe stress, with Welspun Living likely to swing into losses:

The home textile exporter faces challenges from tariff impacts and absorption of higher costs amid a difficult demand environment.

Energy and Pharmaceutical Sector Impact

GAIL India, the nation's largest natural gas transmission company, is projected to see core profit decline 55% year-on-year to ₹1,742.00 crore from ₹3,867.00 crore. Weakness in its LPG and petrochemical segments due to low regional LPG prices and continued losses in its petrochemical division are expected to impact overall profitability.

In pharmaceuticals, both NATCO Pharma and Orchid Pharma face significant challenges:

Consumer and Infrastructure Sectors

Bajaj Electricals faces weak consumer demand and adverse operating leverage, with profit expected to tumble 52% year-on-year. The consumer durables company has been struggling with demand scenarios and competitive pressures on margins.

Sapphire Foods India, operating Pizza Hut and KFC outlets, expects net profit to fall 62% year-on-year. The QSR operator battles weak same-store sales growth, with KFC expected to report flat SSSG and Pizza Hut facing an 11% decline.

KNR Construction is expected to report a 55.7% year-on-year decline in adjusted PAT to ₹40.00 crore, despite operating margin improvement of 160 basis points year-on-year due to better execution following weak Q2 performance.

Market Outlook

Weak global growth, margin compression due to increased competitive intensity, and muted consumer demand in certain segments are the primary factors behind the earnings slowdown for these companies. While sectors like industrials, domestic auto, metals, and durables are expected to show strong growth, exporters in chemicals, auto, and pharma segments are likely to face continued headwinds.