Diversifying assets: RBI strategy has a heart of gold

Mumbai: The Reserve Bank of India (RBI) has accelerated gold purchases since October to mitigate revaluation risks to its foreign exchange stockpile and minimise currency volatility, with a part of the reserves that have come off record highs since late September likely also being used to cushion the rupee’s fall against the US dollar.The central bank bought 20 tonnes of gold during October-November, compared with 30 tonnes during the first six months of the current financial year, showed an ET analysis of latest RBI data. “The buying of gold by central banks is driven by the need to diversify assets in which forex reserves are held,” Gaura Sengupta, chief economist at IDFC Bank, told ET. “The high concentration of foreign currency assets in securities such as short-tenor US treasuries opens up risks of revaluation loss when US Treasury yields rise.”

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Cumulatively, the central bank has bought 50 tonnes of gold so far in FY25.

RBI’s gold reserves are at 876.18 tonnes as of November 29, 2024. This financial year, gold prices have risen 19%. But prices were relatively stable in the two months during which RBI stepped up its gold purchases.

Significantly, unlike many of its peers – such as the central banks of Turkiye, Switzerland or China -RBI seldom sells gold, as it is a politically difficult decision. World Gold Council data showed that gold’s share in India’s foreign exchange reserves is one of the highest among major central banks, at more than 10%.

As of September, 83.5% of India’s foreign currency assets were held in securities and the rest in deposits with other central banks and the Bank for International Settlements.

“While safety and liquidity constitute the twin objectives of reserve management in India, return optimisation is kept in view within this framework,” RBI said in its latest half-yearly report on the ‘Management of Foreign Exchange Reserves.’

India’s foreign exchange reserves declined $47 billion between end-September, when both the stockpile and equity indices had hit record highs, and end November. The bulk of the fall in reserves is attributed to valuation losses.

“Another risk of revaluation loss rises during periods of dollar strength. Currently, central banks are facing both rising US Treasury yields and dollar strength, resulting in substantial revaluation loss,” Sengupta said. “The diversification of forex reserves into gold is aimed at reducing the risk of revaluation loss.”