RBI fattens gold reserves as it braces for global uncertainty

The recent purchases have swelled RBI’s total gold reserve to just under 800 tonnes, marking a new record for the central bank. Prior to this, RBI acquired about 27 tonnes between April and December 2022.

“RBI has bought close to 40 tonnes of gold in FY23 with an uptrend in the gold price and weakness in other assets, including dollars," a bullion expert said on the condition of anonymity.

The official data on India’s gold reserves for the March quarter is yet to be made public by miner’s body World Gold Council (WGC)

A query sent to the spokesperson for RBI on its gold-buying programme remained unanswered.

RBI has consistently increased its gold holdings for the past five fiscal years through February 2023, according to research by the World Gold Council (WGC) and Mint. In total, the bank procured about 230 tonnes of gold during this period to bolster its reserves amid rising global economic uncertainty and geopolitical tensions, which threaten to diminish the value of the world’s reserve currency, the dollar.

Experts and economists expect the trend to continue.

“Purchases from emerging markets central banks remain high, which should act as a floor for the gold price," said a 24 April report by Swiss private lender Bank J. Safra Sarasin Ltd.

RBI, in the March quarter, has emerged as one of the top five gold buyers in the world, including Singapore, Russia, China and Turkey, as shown by the Swiss bank.

Gold price gained 9% in the January-March 2023 period. “A surge in March to record the highest monthly inflows since 2019 reversed two weak months for global gold ETFs and futures investment," according to a WGC April report.

After buying 200 tonnes from the International Monetary Fund (IMF) in 2009, RBI didn’t add much yellow metal to its reserves.

However, from FY18, RBI has steadily increased its gold reserve from 560.3 tonnes to 790.2 tonnes as of February 2023 end, according to WGC, which collates data from IMF.

The latest WGC data on global exchange-traded funds (ETF) flows also reveal that the tide has finally turned for gold.

“For the first time in 12 months, gold ETFs have seen net inflows across all continents in March," said the report by J. Safra Sarasin.

“They (RBI) have been purchasing gold for five years on the trot as data through February shows," said Somasundaram P.R., managing director, India, WGC, adding that he expects RBI to remain buyers in March and the trend could continue, given the safe haven status of the metal.

By proportion of total forex holdings, RBI’s gold reserve has increased from 5.58% in the fourth quarter of FY18 to around 8% at the end of the March quarter of FY23.

This means about $46.2 billion of RBI’s holdings is in gold out of the $568 billion total. The global forex reserves held by Central Banks comprise currencies like the dollar (58%), euro (20%), pound (5%), other currencies (3-4%), gold and IMF’s currency quotas called special drawing rights (SDR).

“The demand from (central banks of emerging markets including India) is set to remain strong," said J. Safra Sarasin.

“The institutional purchase is a part of the central bank’s strategy to diversify its forex reserves. This is an effort to reduce the dependency on political goodwill from the US," said a bullion expert.

Overall, RBI holds the 10th largest gold reserves in the world after the likes of the US (8,134 tonnes), Germany (3,355 tonnes), IMF (2,814 tonnes), Italy (2,452 tonnes) and France (2,437 tonnes).

RBI’s buying coincides with other central banks also diversifying their reserves amid economic uncertainty induced by the outbreak of covid-19 pandemic and the Russia-Ukraine conflict.

“Central banks across the world picked up 2.5 times gold in 2022 vis-a-vis 2021 and the highest in 55 years," said Shekhar Bhandari, president of global transaction banking at Kotak Mahindra Bank.

“Gold reserves coupled with a strong economy, balanced CAD, and good BoP lay the foundation for the rupee as the world reserve currency over the next 10 years," Bhandari said.

Madan Sabnavis, chief economist of Bank of Baroda, said the buying reflected the central bank’s intent to diversify its reserves. It was more of a safe bet, he added.

Since the beginning of the year, gold has shown a stellar performance.

Year-to-date, the precious metal has risen by more than 10% in dollar terms.

Gold has performed even better when expressed in terms of commodity-linked currencies, said J. Safra Sarasin.

Following the precious metal’s retracement in February, the collapse of US-based Silicon Valley Bank (SVB) in early March led to a resurgence of market volatility, initiating a strong gold rebound, as per bullion experts.

“We expect more cracks in the financial system to emerge in the months to come, given the current degree of financial tightening. In our view, this points to continued support for gold, which has usually risen strongly at the onset of episodes of financial distress or elevated geopolitical uncertainty," the J. Safra Sarasin report said.

Financial market uncertainty is indeed very high at present, and this time, Switzerland is contributing to it.

The demise of Credit Suisse and the total loss of its AT1 bonds—however justified from a regulatory perspective—do not increase confidence in the Swiss financial centre and the Swiss franc as a safe haven.

JP Morgan, in a 25 April report, said, “Given the potential crosscurrents, we think gold is likely to be more range-bound, whereas industrial metals can come under more significant pressure."