As FPI exits hit foreign exchange reserves, RBI stepped up gold purchases

India’s gold holdings have gone as much as 760.42 tonnes, with the Reserve Bank of India (RBI) including one other 16.58 tonnes of the yellow metallic to the nation’s overseas alternate kitty throughout the six months ended March 2022.

RBI’s gold acquisition occurred at a time when overseas portfolio buyers (FPIs) have been exiting India and foreign exchange reserves declined by $44.73 billion from $642.45 billion in September 2021 to $597.72 billion on April 29, 2022, as per Reserve Bank knowledge.

While 453.52 metric tonnes of gold are held abroad in secure custody with the Bank of England and the Bank of International Settlements, 295.82 metric tonnes of gold are held domestically. In worth phrases (USD), the share of gold within the complete overseas alternate — or foreign exchange — reserves elevated from about 5.88 per cent as at end-September 2021 to about 7.01 per cent as at end-March 2022, says the RBI’s Report on Management of Foreign Exchange Reserves.

The worth of the RBI’s holdings has gone up by $5.162 billion in six months to $42.55 billion as of March 2022. India’s gold holdings have now gone up by 65.11 tonnes from 695.31 tonnes in March 2021 and by 142.18 tonnes within the final two years, making India the ninth-largest holder of gold reserves. While gold not performs a direct function within the worldwide financial system, central banks and governments nonetheless maintain intensive gold reserves to protect nationwide wealth and shield in opposition to financial instability. Central banks are shopping for gold at an ever-increasing tempo.

Gold is the third largest reserve asset globally, following US dollar- and euro-denominated property. It can be more and more used as collateral in monetary transactions, very like different high-quality, liquid property like authorities debt, as per World Gold Council (WGC).

However, a sizeable gold holding is predicted so as to add stability to the foreign exchange reserves at a time when capital outflows are placing stress on India’s reserves. Bank of England continues to be the preferred storage location, with 63 per cent of respondents vaulting there, says a WGC survey. This marks a big improve from final yr and should point out rising significance hooked up to retaining gold in liquid buying and selling centres.

Domestic storage has additionally grown to 39 per cent of respondents, additionally increased than earlier years.

According to the 2021 Central Bank Gold Reserves (CBGR) survey, 21 per cent of central banks intend to extend their gold reserves over the following 12 months. Central banks are additionally more and more valuing gold’s efficiency during times of disaster as this attribute now tops their rationale for holding gold. Gold has lengthy shaped an vital a part of India’s foreign money reserves. Even with a considerable inventory of gold reserves, gold’s share in complete reserves had declined over the previous decade as a result of huge progress in dollar-denominated property.

This led the RBI to rebalance its reserves by way of the acquisition of 200 tonnes of gold in late November 2009, taking its inventory of gold to 558 tonnes, or 8.5 per cent of complete reserves, and making it the eleventh largest official sector holder of gold on the planet, WGC stated. RBI’s gold reserves have gone up additional since then.