Central Idea: The RBI has increased its gold reserves by 34.22 tonnes YoY to reach 794.64 tonnes at the end of March 2023, according to the central bank’s data.

What are Gold Reserves?

• Gold reserves refer to the physical gold holdings that a central bank or a country holds as a part of its foreign exchange reserves.
• Central banks may acquire gold reserves through various means, including purchases from other central banks, international organizations, or commercial banks, and from domestic production or importation.
• Gold reserves are typically held in the form of gold bars, which are stored in secure vaults or depositories.

Why Gold?

• Gold is considered a safe-haven asset and has been historically used to back a country’s currency.
• Holding gold reserves is seen as a way to hedge against inflation, currency fluctuations, and other economic uncertainties.

Significance of Gold Reserves

• Economic stability: Gold reserves are often seen as a symbol of economic stability and confidence, especially during times of financial crisis or uncertainty. Holding gold reserves can help central banks to maintain the stability of their currency and the economy.
• Diversification: Gold is considered a safe-haven asset and can provide diversification to a country’s foreign exchange reserves portfolio. Diversification helps to reduce the risks associated with any single asset class.
• Hedge against inflation: Gold is considered an inflation hedge as its value tends to increase during times of high inflation or when the value of a currency is depreciating. Holding gold reserves can help to protect the purchasing power of a country’s currency.
• International transactions: Gold reserves can be used as collateral for loans and international transactions. Countries can also use gold reserves to settle international debts.
• Confidence-building: The level of a country’s gold reserves can be an indicator of the country’s financial strength and stability. High levels of gold reserves can help to build confidence among investors and other countries.

Breakdown of RBI’s gold reserves

• Total: As of March-end 2023, the RBI held 794.64 metric tonnes of gold, including gold deposits of 56.32 metric tonnes.
• Domestic and abroad: Out of the total gold reserves, 437.22 metric tonnes of gold is held overseas in safe custody with the Bank of England and the Bank of International Settlements (BIS), while 301.10 metric tonnes of gold is held domestically.

How much do these gold reserves value?

• In value terms (USD), the share of gold in the total foreign exchange reserves increased from about 7.06% as of September-end 2022 to about 7.81% as of March-end 2023, as per the RBI’s report.
• During the half-year period, the reserves increased from $532.66 billion as of September-end 2022 to $578.45 billion as of March-end 2023.

Back2Basics: Foreign Exchange (Forex) Reserve

• Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
• They are commonly used to support the exchange rate and set monetary policy.
• In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
• Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
• Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

India’s forex reserves cover:

1. Foreign Currency Assets (FCAs)
2. Special Drawing Rights (SDRs)
3. Gold Reserves
4. Reserve position with the International Monetary Fund (IMF)

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