Geo-political risks push RBI to strengthen gold reserves to a record 879 tonnes

The RBI’s move to add more gold to its kitty and the recent rally in prices of the yellow metal to a new high allowed it the wiggle room to dip into forex reserves to smoothen volatility in the rupee’s movement against the dollar.

The country’s forex reserves have fallen 10 per cent from $704 billion as of last September-end to $636 billion on Friday. But for the addition of gold, the reserves would have fallen further.

Despite RBI intervention, rupee has depreciated by about 3 per cent in last six months to 86.50 per USD on Friday against 83.75 logged in last August.

Amid raising geo-political uncertainty, RBI had consecutively bought 73 tonnes of gold in the first 11 months of last year.

After pausing in December, RBI added 2.8 tonnes of gold to its reserves in January, taking its total gold reserves to a new high of 879 tonnes.

Kavita Chacko, Research Head-India, World Gold Council, said the renewed buying suggests that the RBI is likely to continue with its gold accumulation after emerging as the third largest buyer of gold among global central banks last year.

The share of gold in India’s forex reserves has steadily climbed to 11.31 per cent by early February from 7.7 per cent in January 2024, she said.

The increase of gold holding reflects the RBI’s efforts to diversify its forex reserves, alongside a decline in its holding of foreign currency assets from 88.5 per cent to 85.2 per cent.

Given the global uncertainty, central banks across the globe have mopped up over 1,000 tonnes of the precious metal last year with Poland topping the table with 90 tonnes followed by Turkey and India at 75 tonnes and 73 tonnes, respectively.

In fact, the buoyant gold purchase by the central banks have pushed up prices amid weak retail jewellery demand, especially in India and China.

The LBMA (London Bullion Merchant Association) gold price had touched record highs 40 times last year. The average gold price hit a new high of $2,663 an ounce in the December quarter, leading to 23 per cent jump in average annual price of $2,386.

In fact, gold prices continue to rally growing concerns on US President Donald Trump’s inflationary trade policies.

Following this, gold prices have been hitting new high, with the latest peak of $2,947 an ounce (spot), taking the year-to-date gain to 12 per cent. In under two months of the current calendar year, prices have registered 13 record highs, indicating that investors are quickly moving away from risky assets such as equities.

Courtesy: The Hindu Business Line