GS Paper 3
Syllabus: Indian Economy and issues relating to planning, mobilization of resources
Source: IE
Context: The RBI’s gold reserves touched 794.64 metric tonnes in fiscal 2023, an increase of nearly 5% over fiscal 2022.
Gold reserves
- Meaning: It is the gold held by a national central bank.
- Purpose:
- 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.
Why gold is used as a reserve in Central banks?
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.
Comparing with total foreign exchange reserves:
- As on March 31 2023, India’s total foreign exchange (forex) reserves stood at $578.449 billion, and gold reserves were pegged at $45.2 billion.
- Thus, the share of gold in the total forex increased from about 7% (March 2022) to about 7.81%.
Why are these reserves 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.
What are other central banks doing?
- 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.
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