With G-sec yields rising, countries have no alternative but to increase their bullion holdings

When the Global Financial Crisis hit in 2008, RBI deputy governor Rakesh Mohan tried hard to rechristen the crisis as the 'North Atlantic Crisis' on the grounds that it was essentially a, well, North Atlantic crisis. But that crisis subsequently engulfed the world. All the talk of decoupling did nothing to save the rest of the world from the chaos that followed.

Likewise with the bond crisis now engulfing much of the advanced world. It's not often that developing countries like India can hold a candle to the developed world. The bond market is proving an exception. For a change, the developed world looks like it's drowning even as the developing world, particularly India, looks the picture of mature fiscal management. Why? The first core principle of the 1989 Washington Consensus - observe fiscal discipline - has been taken to heart by countries like India, while the West ignored it.

What is likely to be the effect of this? Will the developed world get away this time round? According to IMF, long-term sovereign yields have increased across several major advanced economies. Between February and September, G7's average 10-yr government bond yield increased by over 1 percentage point, reaching its highest level in nearly two decades.


In India, in contrast, yield on T-year G secs has increased by 0.4 percentage points over the same period. Unfortunately, governments are confronting these higher borrowing costs precisely at a time when debt is elevated, with global public debt expected to exceed 100% of GDP by 2030, a level last reached in the immediate aftermath of WW2.

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But in India, total government borrowing is expected to remain at less than 100%. India's general government debt-to-GDP ratio stands at 81.8-83.5% when combining central and state government obligations. For GoI alone, it is expected to fall to the mid-50s. Though the number might change post-Trump tariffs and hike in international oil prices, it is nowhere near where Western governments now find their debt-GDP ratios.

Europe is where the danger of a debt crisis is real. The AI boom is raising its cost of capital. But, in contrast with the US, Europe is enjoying far less of a boost to economic growth. In the US, apart from the oil price shock and persistent inflation, there is now heightened competition between government and companies for capital as large AI companies borrow aggressively to fund their expansions.

The bottom line is there's no getting away from fiscal fundamentals. In major advanced economies, the combination of high debt, spending pressures and prospect of large bond issuance in the years ahead are putting upward pressure on yields investors demand to hold longer-term bonds.

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The problem is higher benchmark yields in major economies can also spill across borders, worsening debt dynamics elsewhere. We've already seen the effect of rising yields on capital flows into India. And while schemes like FCNR(B) might buy time, they are expensive and all they do is buy time, nothing more.

But beyond immediate issue of implications for debt inflows as yields rise elsewhere, what does all this mean for deployment of our reserves? Remember, price moves in the opposite direction as yield. Sure, the US has the 'exorbitant privilege' of issuing debt in currency that the rest of the world still wants. But what is certain is that the world will have to invest its reserves in other instruments.

As of August 2026, India was 14th-largest holder of US treasuries (though India's holding of $219.7 bn was dwarfed by No. 1 holder Japan's $1,068 bn). But as worries about the US capacity to repay, without inviting inflation, mount, countries will have to look to other avenues.

What might these instruments be? It could be Chinese government bonds. But the lingering fear of China means this is likely to be a no-no. We've seen governments move away from investing in US treasuries and the higher yield is a measure of what the US has to pay to attract investor interest. Consider.

The yield on 10-yr US treasury rose by close to 4.7 percentage points during 2020-26, even as the yield on comparable T-bills in India's rose by about 1.4 percentage points. No wonder China's holdings of US treasuries fell to $659.3 bn in May 2026, down from $732.7 bn a year earlier. Likewise, RBI reduced India's holdings of US treasury securities to $181 bn in April 2026, marking a near-6-yr low and a sharp drop from $232 bn in April 2025.

So, what's the alternative? Gold.

According to World Gold Council in 2025, the market value of gold held in official reserves overtook the value of US treasuries held by central banks. Gold reserves in India averaged 544.18 t from 2000 to 2026, and reached an all-time high of 880.52 t in Q1 of 2026.

However, RBI has not added to its reserves since. But with yields on government bonds rising across the world, India, along with many countries in the world, will find there is no alternative but to invest in gold.