In a strategic move reminiscent of Indian
households safeguarding their wealth, the Reserve Bank of India (RBI) is
fortifying the nation’s economic resilience by actively acquiring gold
reserves. This bold initiative mirrors the prudence of household savers, as the
central bank positions itself to shield against potential economic turmoil and
bolster the country's financial stability.
The RBI now has accumulated gold reserves
of 817 tonnes. This surge can be attributed to a combination of factors
including escalating tensions in West Asia, Israel assault on Palestine, the
Russia-Ukraine war, and persistent inflation, all of which have heightened the
appeal of gold.
Central banks worldwide are actively
accumulating gold to diversify reserves and reduce dependency on the US dollar.
China, in particular, has been on a gold-buying spree for the 17th consecutive
month, aiming to hedge against currency depreciation and geopolitical risks.
The world is unofficially going back to gold standards it abandoned in 1971.
India is also hit by a continuous six-day
fall in the stock market. It wipes out a significant investment. The loss is
estimated at Rs 7 lakh crore. The household savers, of course, got their
savings dipped as unemployment and rising prices hit them. Though RBI. in a
clarificatory note on May 9, mentions that “they are putting their savings into
real estate and the central bank is not worried of the phenomenon”.
The bank itself has stepped up gold
purchases to “help diversify its foreign exchange reserves base amid the US
dollar volatility”. The US inflation rate in February hit 3.2 per cent year
over year. Since the Federal Reserve began raising rates in 2022, it has raised
rates to 5.25 per cent to 5.5 per cent in July 2023. It’s holding further raise
in view of the US elections.
The price of gold has surged over 10 per cent since the start of the year,
cementing its status as a preferred hedge against inflation and a sanctuary
amid political and economic uncertainty. This significant uptick is largely due
to considerable purchases by central banks and a rising demand for safe-haven
assets.
Gold prices, in India, have been
experiencing a significant surge in 2024, with a remarkable rally that has
propelled them to an unprecedented all-time high of over Rs 73,000 per 10 gm
two days before Akshay Tritiya, when customary gold purchases reach a peak.
This surge represents an impressive increase of approximately 21.1 per cent within
the span of just one year. On the day of Akshaya Tritiya on May 10, it has
slightly dipped to Rs 72,788. Over six months, domestic gold prices surged from
Rs 54000 per 10 grams to a record high of Rs 73,958.
One can realise that nothing can
appreciate faster than the gold and can’t question the RBI’s sagacity. One
dollar is at Rs 83.88. Rupee is expected to rise to Rs 82.50 in six months, a
gain of about a 1.1 per cent, and in a year it could rise to Rs 82 - a gain of 1.7
per cent. It means the RBI dollar reserves would lose about 2 per cent value in
a year. So, the RBI has decided to buy more gold than dollars. Its investment
would be less at even Rs 73000 for 10 gm and gains over 20 per cent. That’s an
intelligent economy.
The RBI has increased gold purchases to
diversify reserves, with gold value contributing to a $3 billion rise in forex
reserves to $648.5 billion. The RBI is acquiring more gold in early 2024,
aiming for diversification and inflation hedging. The World Gold Council (WGC)
says that RBI gold purchases touch 19 tonnes during January-March. This dwarfs
the 16 tonnes of gold it bought in the whole of 2023.
In terms of countries with the highest
gold reserves, USA leads with 8,133 tonnes, followed by Germany, Italy, France,
and the Russian Federation with 3,366.49, 2,451.84, 2,436.01, and 2,271.16
tonnes of gold, respectively, according to WGC. The surge in central banks’
gold acquisitions stemmed from the aftermath of the US imposition of sanctions
on Russia. These sanctions, triggered by Russia’s invasion of Ukraine, included
freezing Russian reserve dollars and imposing restrictions on crucial commodity
trades such as crude oil. The global repercussions of these measures were
profound, exposing vulnerabilities within Western financial institutions.
The option of investments in the stocks
has become riskier. In February, China divested an
additional $22.7 billion in U.S. Treasury securities, as per the latest Federal
Reserve data, reducing its total holdings to $775 billion. Despite this
decrease, China retains its position as the second-largest foreign holder of
U.S. debt. China is reducing its dependence on dollar, as per US Federal
Reserve data.
According to ICICI direct study,
the
RBI wants to diversify its foreign exchange reserves and reduce dependence on
the US dollar. Gold offers stability and isn’t directly tied to the performance
of any one currency. It can be especially valuable during times of economic
uncertainty or fluctuations in the dollar’s value. Gold is considered as a
hedge against inflation. When the value of currencies weakens due to inflation,
gold tends to hold its value or even increase. It protects the purchasing power
of India’s foreign reserves.
The diversification of the portfolio to
gold reserve, RBI says, can inspire confidence in the Indian economy from
foreign investors. It signals a strong financial position and stability,
potentially attracting more foreign investment. While less common today, gold
can still be used for international transactions. Holding a gold reserve allows
India to settle debts with other countries if needed, even if those countries
aren’t willing to accept the rupee.
The next few years can be times of turmoil and
gold can be a stabilising factor in the international economy. It is
particularly so as the IT sector, industry, markets are in a destabilised
condition and would take time to calm. At such volatile times, gold is likely
to be more in demand than paper currencies. The RBI has resorted to the right
move and lead the India economy, which has been striving to become one of the
major world economies.
(This article is authored by Shivaji Sarkar)
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