Why is the Reserve Bank piling up tonnes of gold?
Feb 17, 2025, 06:43 IST
Gold has lately been on a red-hot streak, with the price rising more than 10% so far in 2025. Gold prices jumped more than 1.5% on Monday to hit a record high. The gold is high on safe-haven demand due to fears of a global trade war after US President Donald Trump announced new tariff plans. Trump announced on Sunday plans to impose an additional 25% tariff on all steel and aluminium imports. He also said he will announce reciprocal tariffs this week, matching rates imposed by other countries and applying them immediately. Gold is considered a safe investment during economic and geopolitical turmoil.
The Reserve Bank of India (RBI) has been significantly increasing its gold reserves, a strategic move influenced by several key factors:
1. Diversification of Foreign Exchange Reserves: Traditionally, India's foreign exchange reserves have been heavily weighted towards assets denominated in U.S. dollars. By augmenting gold holdings, the RBI aims to reduce dependence on any single currency, thereby enhancing the resilience of its reserves against global financial market fluctuations.
2. Hedge Against Inflation and Currency Volatility: Gold is universally recognized as a hedge against inflation. In times of currency devaluation or economic instability, gold tends to retain or even appreciate in value, providing a safeguard for the nation's wealth. This characteristic makes it a prudent choice for central banks looking to protect their economies from adverse financial conditions.
3. Geopolitical Considerations and Asset Security: The global geopolitical landscape has become increasingly uncertain, with events such as economic sanctions and asset freezes highlighting the vulnerabilities of holding reserves in foreign jurisdictions. In response, the RBI has not only increased its gold purchases but has also repatriated significant quantities of gold previously stored abroad. For instance, between April 2022 and September 2024, the RBI brought back approximately 214 tonnes of gold to domestic vaults, ensuring greater control and security over these assets.
4. Strengthening Economic Stability and Investor Confidence: A robust gold reserve serves as a confidence booster for both domestic and international investors. It signals a strong financial foundation and the ability to withstand economic shocks, thereby enhancing the country's creditworthiness and attractiveness as an investment destination.
In summary, the RBI's strategy to accumulate and secure gold reserves is a multifaceted approach aimed at diversifying assets, hedging against economic uncertainties, addressing geopolitical risks, and bolstering overall economic stability.