The Reserve Bank of India (RBI) bought 8.7 tonne of gold in January, making it the largest purchase by the central bank since July 2022. The RBI’s gold holding has climbed to 812.3 tonne in January, from 803.58 tonne in December 2023, according to the World Gold Council data. The central bank is adding gold to diversify its forex reserves and hedge against foreign currency risks, experts say.
“The RBI is strategically increasing gold reserves as part of its forex diversification efforts,” Madan Sabnavis, chief economist, Bank of Baroda, told FE. “With the recent surge in dollar volatility and the upward trajectory of gold prices, this move not only enhances the stability of India’s foreign exchange reserves, but also makes it a prudent financial decision.”
The RBI started buying gold from the calendar year 2018. Before that, it had purchased 200 tonne in 2009 during the global financial crisis. The central bank has added nearly 17.7 tonne in the first 10 months of the current financial year.
Turkey, China and Kazakhstan also bought significant volume of yellow metal in January. Turkey bought 11.8 tonne of gold, China purchased 10 tonne and Kazakhstan bought 6.2 tonne.
Central banks across the world have aggressively been adding gold to their foreign exchange reserves over the past five years to hedge foreign currency risks.
Gold prices have moved up consistently over the last one year and hit a fresh high of Rs 65,000 per 10 gram last week, as traders ramped up bets of a start to interest-rate cut by the US Federal Reserve in June, with investors pouring money into the safe-haven asset as the Middle East war drags on. Gold, often sought as a safe store of value in times of economic turmoils, benefits from the US central bank easing as it pushes down bond yields and the dollar, making the metal more attractive.
“The RBI is buying gold as a measure to diversify its foreign exchange reserves. In a volatile and an uncertain market, most of the reserve currencies are subject to changes, and hence diversification through gold holdings is an appropriate strategy,” said Vivek Iyer, partner, Grant Thornton Bharat. “Further, the status of dollar as a global reserve currency for settlement is in question with various geopolitical uncertainties warranting non-dollar bilateral settlement of currencies. So, gold is a good bet to hold during these times,” Iyer said.
The government on Wednesday issued a notification which allows the RBI to import gold without paying levies. Generally, import of gold attracts 15% import duty, including 5% agriculture infrastructure development cess.