The Reserve Bank of India (RBI) has reported significant growth in its gold reserves for the financial year 2019-20 according to its ‘Report on Management of Foreign Exchange Reserves’. The RBI’s holdings amounted to a robust 653.01 tonnes, marking an increase from the preceding fiscal year.
Significant Increase in RBI’s Gold Reserves
The RBI had total gold reserves of 612.56 tonnes in the fiscal year that ended in March 2019. In the new report, the addition of 40.45 tonnes of gold has notably pushed up the value of gold reserves to $30.57 billion by March 2020, a substantial rise from the $23.07 billion valuation in March 2019. Key to note is that this information is part of the half-yearly reports the RBI publishes in its bid for higher transparency and disclosure level.
Gold’s Share in Total Forex Reserves
In the recently concluded fiscal year, the gold’s share rose in total foreign exchange (forex) reserves. It went up from about 5.59% in March 2019 to about 6.40% by March 2020. The forex reserve is a combination of Foreign Currency Assets, Gold reserves, Special Drawing Rights, and Reserve position with the International Monetary Fund (IMF).
Overseas & Domestic Gold Reserve Locations
Of the total gold reserves, around 360.71 tonnes is held overseas in safe custody with the Bank of England and the Bank for International Settlements. The rest of the gold is securely stored domestically.
How Gold Reserves Support Central Banks
Central banks worldwide, guided by these gold reserves, can target the necessary measures to mitigate the economic impact of Covid-19.
Booking Gains or Losses on Valuation
Any gains or losses on the valuation of foreign currency assets and gold due to exchange rates movements or gold price are tracked under a balance sheet head named the Currency and Gold Revaluation Account (CGRA). The CGRA presents the value of the gold and foreign currency that RBI holds for India. These funds can offset any loss in the value of gold and foreign exchange reserve holdings.
The Role of Gold in Economy
Gold played a major role as a world reserve currency for the better part of the 20th century, back when the United States used the gold standard until 1971. Despite the discontinuation of the gold standard, some economists advocate its return given the volatility of the U.S. dollar and other currencies.
Gold as an Inflation Hedge
Gold’s demand escalates during inflationary times because of its inherent value and limited supply. As it can’t be diluted, gold can maintain value better than most currencies.
Impact on Currency Strength
A country’s currency value will decline if it imports more than it exports but will increase if the country is a net exporter. Therefore, countries that export gold or have access to gold reserves will experience a boost in their currency strength when gold prices rise, as this increases the value of the country’s total exports.
By printing and supplying more money to buy gold, central banks inadvertently cause a surplus of the currency, subsequently leading to a decrease in its value.
