10 May 2019
Mumbai: Rising trade protectionist measures along with threat of a currency shock and dovish global monetary policy might compel India's central bank to augment its gold reserves.
Additionally, the need to have a diversified foreign currency and asset reserve will keep the Reserve Bank's gold deposits glittering, opined economists and industry watchers.
The trend, they said, has led the country's central bank to increase its gold reserves to 608.8 tonnes.
As per World Gold Council, India's central bank holds the 11th largest gold reserves in the world as of May, in comparison, the US reserves are pegged at 8,133.50 tonnes, Germany (3,369.70), IMF (2,814), Italy (2,451.80), France (2,436) and Russia (2,168.3).
"Ongoing trade tensions and economic sluggishness remain the driving factors behind this continued diversification through gold," said Alistair Hewitt, Director of Market Intelligence at the World Gold Council on the trend of gross purchases by four central banks.
India's forex reserves comprise Foreign Currency Assets (FCAs), gold reserves, Special Drawing Rights (SDRs) and India's reserve position with the International Monetary Fund (IMF).
Latest data had shown an increase of $4.368 billion in overall reserve during the week ended April 26 to $418.515 billion.
According to Anindya Banerjee, Deputy Vice President for Currency and Interest Rates with Kotak Securities: "RBI is maintaining a share of 5-6 per cent of its total reserves in gold. As the reserves rose, RBI has increased the amount of gold it is holding, without increasing the share."
The RBI's weekly data had showed that the value of the country's gold reserves was stagnant at $23.303 billion.
In the view of Tapan Patel, senior analyst, commodities, HDFC Securities, higher gold reserves guarantees asset diversification in terms of de-dollarisation to counter the volatile currency fluctuations amid strong foreign inflows.
"The global economic uncertainties pertaining to trade war, dovish US FED and lower interest rates has prompted India's RBI to increase gold buying diverting to safer assets. However, we expect RBI will try to keep gold reserves steady around 6.50% of overall reserves kitty and maintain the ratio of foreign currency and gold reserves."
Lately, concerns have been raised over the impact of US debt level of around $22 trillion on the greenback.
"There are concerns that this huge debt might lead to a reset of the dollar which would have major consequences for central banks holding reserves in dollar. Therefore, gold purchase by central banks is by way of diversification," V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
On a nostalgic note, for gold's value as the country's ultimate saviour, Indians still remember the time when the government had to pledge India's gold reserves with IMF in 1990-91
However, even 29 years after that fateful incident, gold is still revered as a safe haven for the country's central bank.
"Gold's role as a safe haven asset and an effective portfolio diversifier makes it a good medium-term investment choice," said Madhavi Arora, Economist, Edelweiss Securities' FX and Rates desk.
"Besides, gold's ability to improve risk-adjusted returns and its use as valuable collateral are also factors that makes it relevant for central bankers to invest and diversify in gold."