The Reserve Bank of India’s (RBI) gold reserves rose to 794.64 metric tonnes in FY 22-23, marking an approximate 5% increase from FY 21-22 when it stood at 760.42 metric tonnes. According to RBI’s Half Yearly Report on Management of Foreign Exchange Reserves: October 2022 – March 2023, these reserves, combined with foreign currency assets, special drawing rights, and reserve tranche position in the International Monetary Fund constitute India’s forex reserves.
RBI’s Gold Acquisitions
Of the total reserves, 437.22 tonnes of gold are held overseas with the Bank of England and the Bank of International Settlements (BIS). The remaining 301.10 tonnes are stored domestically. As of March 31, 2023, India’s total forex reserves amounted to $578.449 billion, with its gold reserves estimated at $45.2 billion. In dollar value, gold’s share of the total forex reserves increased to roughly 7.81% at the end of March 2023.
According to recent data, the RBI bought 34.22 tonnes of gold in FY 23 and 65.11 tonnes of gold in fiscal 2022. From FY 2019 to FY 2021, the RBI’s gold reserves were recorded at 228.41 tonnes. The World Gold Council’s regional CEO for India revealed that the RBI is among the top five central banks purchasing gold.
Other Central Banks Buying Gold
As per the World Gold Council (WGC), central banks of emerging market economies are primarily buying gold. The WGC report indicated that in 2022, the People’s Bank of China registered its first increase in gold reserves since September 2019. Historically, China has been a large buyer of gold. In 2022, Middle Eastern central banks, including those of Egypt, Qatar, Iraq, the UAE, and Oman, significantly increased their gold reserves. By the end of 2022, the Central Bank of Uzbekistan turned into a net buyer of gold, with its gold reserves rising by 34 tonnes. In the first quarter of 2023, the Monetary Authority of Singapore was the largest single buyer of gold after adding 69 tonnes to its reserves.
Why is RBI Accumulating Gold?
RBI’s hoarding of gold serves as a counter-strategy against negative interest rates. When the RBI has foreign currency (USD) in its reserves, it invests these dollars in US Government bonds to earn interest. Due to inflation in the US, however, the real interest on these bonds has turned negative. This situation has prompted greater demand for gold, enabling the RBI to secure good returns even amid strained economic conditions.
RBI’s gold holdings also offer a good hedge against geopolitical uncertainties, for instance, the Russia-Ukraine war and US-China conflicts. If the RBI has dollars that depreciate or weaken compared to other currencies, it incurs a loss. However, due to gold’s intrinsic value and limited supply, it can retain its value far longer than other forms of currency.
The Significance of Gold in the Economy
For most of the 20th century, gold served as the world’s reserve currency. The US used the gold standard until 1971, which required it to have equivalent reserves of gold to support its paper money. Some economists advocate returning to the gold standard due to the volatility of the US dollar and other currencies.
Gold also boosts the value of a nation’s currency. The value of a country’s currency starts depreciating when its imports exceed its exports. However, if a country exports gold or has access to gold reserves, the strength of its currency increases when gold prices rise.
The central bank of a country can use gold as a medium to protect the market from the influence of foreign currency or use it for open market operations. In both scenarios, Gold can replace G-Sec.
It’s noteworthy that the Reserve Bank of India Act, 1934 provides the legal framework for deploying reserves in different foreign currency assets and gold based on currencies, instruments, issuers, and counterparties.
Last Modified: February 20, 2024