RBI’s gold reserves

Why in news?

•  The RBI’s gold reserves touched 794.64 metric tonnes in fiscal 2023, an increase of nearly 5% over fiscal 2022.

Why RBI maintains gold reserves?

• Earlier:
  • As a guarantee to redeem promises to pay depositors, note holders/paper money/trading peers, during the era of the gold standard – a monetary system (until 1971) in which the standard economic unit of account is based on a fixed quantity of gold.
• Currently:
  • A store of value/ to support the value of the national currency.
  • Unlike fiat currencies, which can be subject to inflation or devaluation due to various economic factors, the value of gold tends to be relatively stable over time, which makes it an attractive asset for central banks to hold as a reserve.
• Additionally, gold is highly liquid, which means it can easily be converted into cash or used to settle international transactions.

Composition of India’s gold reserves:

• The 794.64 tonnes of gold reserves included gold deposits of 56.32 tonnes.
• 437.22 tonnes of gold is held overseas in safe custody with the Bank of England and the Bank of International Settlements (BIS).
• 301.10 tonnes of gold is held domestically.

Why are gold reserves of RBI increasing?

• RBI has been adding gold to its reserves to diversify its overall reserves.
• This change in strategy has been driven by negative interest rates in the past, the weakening of the dollar, global uncertainty and rising inflation.
• As gold is considered a more safe, secure and liquid asset, it can safeguard RBI’s returns.
• Many other central banks, including the Monetary Authority of Singapore (MAS), the People’s Bank of China (PBoC), etc., have been buying gold.
• The two key drivers behind the decision to hold gold – its performance during crisis times and its role as a long-term store of value.

PRACTICE QUESTION:

With reference to ‘foreign exchange reserves’ of India, consider the following statements:

1. They are managed by Securities and Exchange Board of India

2. Gold has the highest share in the total foreign exchange reserves of India.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer