RBI’s gold reserve up over 40% in five years

The Reserve Bank of India’s gold reserves have risen by over 40% since it resumed the purchase of the yellow metal over five years ago. This shows gold has emerged as a strong hedge against inflation and also helped reduce dependence on the dollar to an extent. India’s central bank, unlike others, never sells its gold.

India’s official gold reserves is up from 17.9 million troy ounce in December 2017 to 25.55 million troy ounce in April this year according to the latest RBI data. This roughly translates to 795 metric tonnes of gold.

Central banks alone have bought 228 tonnes during January-April according to the latest World Gold Council report. ” Sustained and significant purchases from the official sector underscore gold’s role in international reserve portfolios during times of market volatility and heightened risk” it said.
“The rising share of gold in reserves is likely part of RBI’s diversification strategy, to reduce the risk to reserves from shocks such as geopolitical risks and Covid-19 ” said Gaura Sengupta, India economist at IDFC First Bank.” As a result, the share of gold in India’s FX reserves has risen to 8% (in value terms) from 5% in 2017

Besides it also helped in protection of reserves from valuation impact of inflation. ” Increased gold purchases by central banks including India is a reflection of their diversification strategy amid increased FX/rates market volatility plus hedging against inflation” said Anubhuti Sahay, head of Asia Economics Research at Standard Chartered Bank. ” Reserves in gold also help to counter-off valuation losses in a scenario of uncertainty which drives USD stronger and gold price higher”.At a time when the supremacy of the dollar is being debated, a strategy to buy gold could mean lower dependence on the green back. ” The purchase of gold helps reduce dependence on dollar and dollar assets,” said Sengupta.” In an inflationary environment gold provides a hedge as its price tends to rise. Post Covid-19 shock there has been a strong rise in gold prices as inflation pressures resurfaced”.From the market perspective, data showed that at the time the RBI bought gold, retail purchases fell due to rising gold prices. But RBI buys gold to add to its foreign currency reserves more as a hedge against inflation than for profits.RBI’s 794.64 metric tonnes of gold included gold deposits of 56.32 metric tonnes, according to RBI’s latest half yearly report on management of foreign exchange reserves. While 437.22 metric tonnes of gold is held overseas in safe custody with the Bank of England and the Bank of International Settlements (BIS), 301.10 metric tonnes of gold is held domestically. In value terms (USD), the share of gold in the total foreign exchange reserves increased from about 7.06 per cent as at end-September 2022 to about 7.81 per cent as at end-March 2023.

Gold may continue to be an important asset from central banks’ forex reserve management perspective. ” Central bank buying is likely to remain strong and will be a cornerstone of demand throughout 2023 – even at lower levels than the record highs seen last year” said Louise Street, senior markets analyst at the World Gold Council in the report. “As some economies teeter on the brink of recession, gold’s role as a long-term, strategic asset could take centre stage as it has a history of delivering positive returns in the last five out of seven recessions.”