Context:
Recently, the Reserve Bank of India (RBI) has brought back nearly around 102 tonnes of gold, which were kept in safe custody in the Bank of England and the Bank for International Settlements.
More on News:
- Gold Repatriation by RBI: The Reserve Bank of India (RBI) recently repatriated 130 metric tonnes of gold from foreign storage facilities, including the Bank of England.
- Strategic Shift: This repatriation marks a strategic change, with the RBI moving towards increasing its gold holdings domestically, reflecting a shift towards greater self-reliance.
- Sign of Economic Confidence: These moves highlight India’s growing economic resilience and confidence in its long-term stability.
About Gold Reserves in the RBI:
- Enhanced Domestic Reserves: The RBI’s domestic gold holdings have reached 854.73 metric tonnes, equivalent to 510.46 metric tonnes as of September 2024. This marks a 60% increase from March 2022, when India held 295.82 metric tonnes domestically.
- Gold’s Role in Foreign Exchange Reserves: The share of gold in India’s foreign exchange reserves rose from 8.15% in March 2024 to 9.32% by September 2024. This diversification highlights gold’s role as a stabilizing factor in the RBI’s foreign reserves portfolio.
- Upgraded Domestic Storage Capacity: India’s enhanced storage capacity now enables it to hold substantial gold reserves domestically. According to the RBI Governor, India’s improved ability to store and manage gold is a step towards safeguarding the country’s financial assets.
RBI’s Strategy for Gold Repatriation:
- Diversification of Reserves: The gold repatriation is part of India’s broader strategy to diversify its foreign exchange reserves and reduce reliance on any single asset or currency. With the increase in the proportion of gold in its reserves, India has become more resilient against economic downturns, currency devaluations, or financial shocks.
- Economic Resilience: Previously seen as economically vulnerable, India now appears more economically robust by repatriating gold and reducing dependency on foreign custodians.
- Gold’s Strategic Value for India: Gold serves as an essential part of India’s strategic reserves that offers a buffer against global currency volatility and commodity price fluctuations. In recent times, India has been increasing its gold purchases that surpass both Russia and China.
- Decreased Reliance on Foreign Custodians: By bringing gold under control, India reduces its dependency on foreign custodians, minimizing geopolitical risks and enhancing national security.
- Preparation for Economic Challenges: With a significant portion of its gold now stored domestically, the RBI gains greater flexibility in managing reserves during times of currency devaluation, trade imbalances, or geopolitical challenges.
- De-dollarisation and Inflation Measures: Recently, in early 2024, the RBI repatriated 100 metric tonnes from the Bank of England. This step reflects a global de-dollarization trend, with central banks shifting from the U.S. dollar to gold. This can lead to inflationary pressures and rising global volatility.
Relationship between Gold Prices and Interest Rate
- Gold prices generally have an inverse relationship with interest rates.
- When interest rates rise, gold becomes less attractive to investors as it does not provide a yield.
- Conversely, lower interest rates and a weaker dollar can make gold a more appealing option for investors seeking a secure asset.
The Central banks accumulate gold for multiple reasons:
- Monetary Stability: Gold acts as a store of value that offers protection against economic uncertainty.
- Currency Support: Gold reserves bolster a nation’s currency enhancing its credibility and supporting its value.
- Investment Diversification: By holding gold, central banks diversify their assets, reducing risk within their investment portfolios.
- International Trade and Payments: Gold reserves assist in international trade and transactions, serving as a universally accepted form of currency.
Note: Countries with large gold reserves include the United States, Germany, Italy, and France.