The share of gold in India's foreign exchange reserves has risen by more than one percent since the pandemic, a trend in line with other central banks, data showed.
Central banks across the globe have been buying gold amid global uncertainty and rising inflation.
According to the Reserve Bank of India’s (RBI) data, gold reserves stood at 7.36 percent of the total reserves as of August 18, 2023, compared to 6.08 percent as of January 3, 2020.
“Gold is considered a secured and liquid asset, as it safeguards its returns amid global uncertainty and a rising inflation scenario. Both have been prevailing at this point due to uncertainty arising from the Ukraine-Russia war as well as global central banks fighting inflation. Central banks across the globe have been seen buying gold,” said Kunal Sodhani, Vice President at Shinhan Bank (Global Trading Center, FX and Rates Treasury).
Since last year, most central banks across the world have started increasing their gold reserves as they turn towards safe haven assets and due to the increase in prices of the metal, which made it attractive.
“One of the biggest reasons for the rush for gold was the geopolitical risk. The Russia-Ukraine war and sanctions by the US and European countries pushed the global central banks to accumulate gold in their reserves,” said Dilip Parmar, a research analyst at HDFC Securities.
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In absolute terms, gold reserves rose to Rs 3.67 lakh crore as on August 18, 2023, as compared to Rs 2.02 lakh crore as on January 3, 2020, as per RBI data.
Gold reserves registered an over 82 percent growth since January 2020.
Meanwhile, total reserves surged 51 percent since January 2020, to Rs 49.9 lakh crore as on August 18, 2023.
“Considering that every economy is slowly trying to move against the dollar, any upheavals spurred by the transition towards a less dollar-reliant world are likely to play into the hands of gold,” Sodhani added.
Further Parmar said that globally, the central banks aggressively added gold to the forex kitty; the Indian central bank included. The Reserve Bank of India, however, added a modest seven tonnes in Q123, lifting its gold reserves to 795 tonnes.
How much gold did central banks accumulate?
On August 11, Moneycontrol reported that central banks turned out to be the record buyers of gold in the first half of this calendar year. Although some slowdown in the buying binge was seen in the April-June period, a report by the World Gold Council says that the strong first quarter had set the tone for the six months.
Central banks picked up 387 tonnes of gold between January and June 2023, while global net purchases totalled 103 tonnes during April to June, a drop of 64 percent on-quarter and 35 percent on-year.
The overall gold demand (excluding OTC), however, dropped 6 percent, largely because of modest outflows from gold ETFs this year as against a strong surge of inflows in early 2022. "Total demand in H1 (inclusive of OTC and stock flows) increased 5 percent to 2,460 tonnes," the WGC report said.
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Can falling rupee be a danger to reserves?
According to money market experts, despite the sharp fall in rupee against the US dollar due to higher inflation, global uncertainties, and fall in the Chinese currency, dealers expect the central bank to continue with the slow and steady pace of accumulation of reserves.
Sodhani from Shinhan Bank said, “We have been maintaining an import cover of 9-10 months, which seems to be decent. Overall, accumulation of reserves is expected to continue at a slow and steady pace.”
Last year, the RBI used its foreign exchange reserves to rescue the rupee from falling sharply, which led to a sharp depletion in the reserves.
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