The Reserve Bank of India (RBI) has increased its gold reserves in recent years, a trend observed among central banks worldwide. This strategy is driven by several factors, including the need to diversify foreign exchange reserves, alleviate concerns about economic uncertainty and currency volatility, and reduce geopolitical risks.
The highly defensive nature of gold makes it a safe-haven asset and an effective hedge against inflation and currency fluctuations. For central banks like the Reserve Bank of India (RBI), diversifying foreign exchange reserves is a priority to reduce reliance on specific currencies, particularly the U.S. dollar. By increasing gold reserves, the RBI can mitigate the risk of revaluation losses, which can occur when the U.S. dollar is strong or U.S. Treasury yields rise. Gaura Sengupta, the chief economist at IDFC Bank, pointed out that investing excessively in short-term debt securities, such as U.S. Treasuries, carries this risk due to the exposure of reserves to revaluation pressures.
As of early April 2024, gold constituted approximately 8.41% of India's foreign exchange reserves and was sourced from gold mined in countries other than India. The pricing of the RBI's gold reserves are typically based on the London Bullion Market Association (LBMA) prices, a leading benchmark for precious metals.
Gold has proven to be a reliable hedge during difficult times and periods of uncertainty. The Reserve Bank of India (RBI) has been actively buying gold to protect against the risks associated with the depreciation of funds tied to the dollar, thereby minimizing potential losses in reserves.
For example, in the fiscal year 2024, from April to September, the RBI's reserves increased by $56 billion, thanks to valuation gains that followed a rise in the U.S. dollar. This was a significant contrast to the same period the previous year when reserves fell by $17.7 billion. The over 25% increase in gold prices during the year contributed to the central bank's substantial recovery in the valuation of its gold stocks.
Since the beginning of October, the RBI has intensified its gold purchases to reduce revaluation risks and support the rupee against the U.S. dollar.
The escalating threat of armed conflict between Russia and Ukraine has become a paramount geopolitical risk in Eastern Europe. As tensions in Ukraine intensify, commodity prices, particularly for traditional safe-haven assets like oil and gold, are experiencing a significant surge.
According to the latest reports, central banks around the world have remained vigilant and continue to acquire gold. As of November 2021, the total gold stock held by central banks worldwide exceeded 7,000 tonnes, with Russia, Turkey, and Poland being the largest net buyers. Notably, Poland and Turkey have purchased more gold than India's Reserve Bank of India (RBI) did in 2016. Data from the IMF indicates that the RBI has experienced fluctuations in its gold stock. In 2016, it was the 11th largest holder of gold globally, with a reserve of 552 metric tonnes.
After an eight-year hiatus, in 2009, the RBI decided to purchase 200 tonnes of gold to support domestic gold mining and to generate income. As of May 31, the RBI's gold stock stood at 676.14 tonnes, following a recent purchase of 19.92 tonnes in the previous fortnight. By August 1, the RBI's gold reserves had increased to 683.61 tonnes.
The Reserve Bank of India's (RBI) recent gold purchases aim to address the challenges surrounding Sovereign Gold Bonds (SGBs). This move highlights the significance of gold in India's economic landscape. As a hedge against inflation and economic downturn, gold prices often rise when a country's economy falters. To mitigate inflationary pressures, introducing specific financial products like Gold ETFs could be a viable solution. Furthermore, the RBI's renewed interest in gold may be driven by a desire to diversify its foreign exchange reserves. A successful Gold ETF launch could increase domestic gold supply, potentially driving down prices and providing a more stable investment option for Indians.
100 metric tonnes of gold were moved from the UK to India by the Reserve Bank of India because the domestic storage was not full. The transferring process of the gold reserves from the UK to India had been marked by confidential agreements made with special aircraft and heightened security measures. Despite the fact that part of the gold reserves that India has is held domestically, more is located in the custody of the Bank of England and the Bank for International Settlements, which are mainly stored in the UK.