The Reserve Bank of India (RBI) has stepped up gold purchases to help diversify its foreign exchange reserves base amid US dollar volatility. The rise in the value of outstanding gold reserves made up more than four-fifths of the near $3-billion increase in forex reserves at a record $ 648.5 billion as of April 5. In January-February this year the RBI bought 0.43 million troy ounce, or close to 13.3 tonnes of gold, from the market. That is over 80% of the total gold purchases of 0.52 million troy ounce in 2023 by the central bank.
“We are building up gold reserves, the data is released from time-to-time” said RBI governor Shaktikanta Das at the post policy media conference on April 5. “All aspects while building up the reserves are assessed and then we make a decision.”
The central bank’s stated objective of holding gold in reserves is mainly to diversify its foreign currency assets base, as a hedge against inflation and foreign currency risks. The Reserve Bank of India has started to accumulate gold regularly from the market since December 2017. Its stock of gold as of end February, 2024 is 26.26 million troy ounce, up from $17.94 million troy ounce in December 2017.
Gold is seen as a stable asset at times of uncertainties and political turmoil. “In my opinion the reason to buy gold is both political and economical,” said Madan Sabnavis, chief economist, Bank of Baroda. “Dollar in general has been a very stable currency, but the dollar ceased to be reliable after the Ukraine war. Today, US bonds are at their highest yields. Dollar is not as strong a currency as it used to be, even though all trades happen in dollars.”
Moreover, the over 7% appreciation in international gold prices since February has also helped in boosting the value of gold in reserves. The gold value in reserves which linked to the prices at the London Bullion exchange is revalued every week. The yellow metal prices are touching new highs and are trading at over $2300 a troy ounce (one troy ounce is about 31 gms).
Also, the faith in dollar assets by central banks appears to be diminishing. Non-US central banks’ holding of US treasury bonds has fallen from 50.1% in January 2023 to 47.2% as of January 2024, according to the US treasury department data. “It makes a lot of sense (to invest in gold), given the increased volatility in the FX market, elevated interest rates in the US, and, of course, also as the central banks in each economy would like to diversify the asset classes in which they are parking their reserves,” said Anubhuti Sahay, head of South Asia Economic Research, Standard Chartered Bank.” For India, the total amount of gold reserves is bound to increase because the corpus of reserves has increased. Moreover, with gold appreciating, that’s also giving a boost. Central banks don’t usually go by just valuation though, there will be bigger factors in our view, which would be diversification of reserves.”
In value terms (USD), the share of gold in the total foreign exchange reserves increased from about 7.9% as of early April 2023 to about 8.41% as at early April 2024.
But the central bank holds only a portion of the reserves locally. According to the latest Report on Foreign Exchange reserves, of the total 800.79 metric tonnes of gold (including gold deposits of 39.89 metric tonnes) the Reserve Bank held 388.06 metric tonnes of gold overseas in custody with Bank of England and Bank of International Settlements (BIS), and 372.84 metric tonnes of gold is being held domestically, as of September 2023.
