India's gold reserves increased by almost 5% to 794.64 metric tonnes in the financial year 2022-23, as per the RBI's Half Yearly Report on Management of Foreign Exchange Reserves.?
The gold reserves are part of India's overall forex reserves, including foreign currency assets, special drawing rights, and reserve tranche position in the IMF.
In FY 23, the RBI purchased 34.22 tonnes of gold, compared to 65.11 tonnes in fiscal 2022 and from FY 2019 to FY 2021, the RBI's gold reserves increased by 228.41 tonnes.?
The World Gold Council's regional CEO for India stated that the RBI is one of the top five central banks in the world that is currently buying gold.
According to the RBI, India holds 437.22 tonnes of gold with the Bank of England and the Bank of International Settlements (BIS) overseas, and 301.10 tonnes of gold domestically.?
As of March 31, 2023, India's total forex reserves amounted to $578.449 billion, with gold reserves valued at $45.2 billion. Regarding USD value, the proportion of gold in India's total forex reserves increased to approximately 7.81% by the end of March 2023.
When the RBI has foreign currency (USD) reserves, it invests them in US Government bonds to earn interest. However, due to rising inflation in the US, the real interest rate on these bonds has turned negative.?
The real interest rate takes inflation into account and is calculated as nominal interest minus the inflation rate. During inflation, the demand for gold typically increases, and as a holder of gold, the RBI can earn a good return even in stressed economic situations.
Gold is considered a good hedge against geopolitical uncertainty as the decline in acceptance of the US dollar by countries like Russia and China due to conflicts with the US and the Russia-Ukraine war could lead to a depreciation in the value of the dollar.?
Holding onto dollars would result in a loss for the RBI in such a scenario. As gold has intrinsic value and limited supply, it can retain its value longer than other forms of currency.
Further, diversifying forex reserves with gold is beneficial as it is a safer, more secure, and liquid asset that performs well during crises and serves as a long-term store of value. Gold has a transparent international price and can be traded at any time.
For most of the 20th century, gold served as the world's reserve currency. The United States used the gold standard until 1971. They were required to have equivalent reserves of gold to back up the paper money. Due to the volatility of the US dollar and other currencies, some economists believe that we should return to the gold standard even though it has been discontinued.
Due to its inherent value and limited supply, inflationary periods see an increase in demand for gold. the yellow metal is able to keep its value much longer than other forms of currency because it cannot be diluted.
The value of a nation's currency will decrease when that nation imports more than it exports. A country that is a net exporter, on the other hand, will see an increase in the value of its currency.
As this raises the value of the country's total exports, a nation that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices rise.
Since the central banks depend on printing more cash to purchase gold, they create an excess supply of the currency. This increases the supply and thereby reduces the value of the currency used to buy it.