Reserve Bank of India Gold Holdings
(Updates 25May2024, 10Nov2023, 04Nov2023 and 07Nov2022 are available at the end of the article)
One interesting fact that came to light after Russian invasion of Ukraine is the methodical shift, especially since 2014, in the composition of Russia's foreign exchange reserves.
Russia has been systematically moving its forex reserves away from US dollar assets in Western countries into gold and Chinese yuan. In 2014, Russia used to be holding nine per cent of its total forex reserves in gold; now gold represents 22 per cent of its forex reserves.
Similarly, Bank of Russia (Russia's central bank) had zero exposure to Chinese yuan. Now, it has kept an exposure of 13 per cent in Chinese yuan. The steep increase in the share of gold and Chinese yuan is at the cost of dollar assets. Bank of Russia now has only 16 per cent of its reserves in US dollar assets versus 39 per cent in 2014.
Geopolitics has been reshaping the economic landscape in the past decade, with Russia moving closer to China to align their economic interests better; and the US and Russia growing their divide.
It seems as if Vladimir Putin, Russia's president, has been preparing for Ukraine invasion and the consequent Western sanctions on Russia. It may be recalled Putin's Russia annexed Crimea from Ukraine in 2014. Western nations, including the US, imposed economic sanctions immediately after annexation of Crimea.
Now, after the Ukraine invasion, the West has imposed more severe and devastating economic sanctions on Russia, in what is described as 'weaponisation of finance' by observers.
RBI Gold Holdings
Russia and China have, for some time, been trying to secure their forex reserves, payment systems and social media and lessen the impact of any possible future economic sanctions by the West.
To avoid over-dependence on SWIFT (Society for Worldwide Interbank Financial Telecommunications), China and Russia developed their own messaging system for financial messaging, though they still depend on SWIFT for a major part of their transactions. Like Russia, China too reduced its share of US dollar assets over the years.
Central banks the world over use their forex reserves mainly for the purpose of safe keeping their trade / current account surpluses and to use them in the event of a run on their domestic currency.
Despite the methodical diversification of its reserves by Bank of Russia, the Russian rouble continues to fall heavily in the past two weeks. From a level of 80 when Russia started Ukraine invasion, the rouble is now quoting at more than 150 versus the US dollar (that is, one dollar equals 150 rouble).
Because of freezing of Russia's forex reserves (that are kept in Western banks), Bank of Russia is severely constrained in preventing rouble's precipitous fall.
(article continues below)
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It is not clear
whether Reserve Bank of India, India's central bank, too has a similar
objective in increasing its gold holdings, which it has been shoring up
ever since it bought 200 tonnes of gold in November 2009 from
International Monetary Fund (IMF).
Between
2017 and 2021, RBI increased its gold holdings by more than 180 tonnes.
As per the latest available data for February 2022, RBI's gold holdings
are valued at USD 42.5 billion, representing 6.7 per cent of its
total forex reserves (see Table 1 below).
Even though India's gold holding as a percentage of forex reserves has improved in the past three or four years to 6.7 per cent now, it remains well below the September 2012 level (9.5 per cent). As observed earlier, diversification into gold by Reserve Bank of India is a good step for macro stabilisation.
As of September 2021, RBI holds 744 tonnes of gold--of which 452 tonnes or 61 per cent is held in safe custody with Bank of England (BoE) and Bank for International Settlements (BIS). The remaining 39 per cent is held within India.
RBI uses both the US dollar and Euro as intervention currencies, that is, to intervene in markets to smoothen any excess volatility in the rupee-dollar exchange rate. However, it keeps its foreign currency assets in major currencies, like, the dollar and Euro.
The absolute value of RBI gold holdings in dollar terms is going up steadily in the past four or five years mainly due to constant accumulation of gold by RBI and the increase in gold dollar rate in recent years.
Table 1: RBI's Gold Holdings and Forex Reserves:
Summing up
Central banks increasing their gold holdings in forex reserves is a good move from a long-term macro stability viewpoint. However, the returns / earnings (see Table 2 below) from RBI's foreign currency assets are abysmal as major central banks globally have been following ultra loose monetary policies (with interest rates at near zero) for more than a decade.
As such, it's better if RBI further increases its share of foreign currency assets to at least 15 per cent of total forex reserves in the next few years.
Table 2: RBI Foreign Currency Assets Earnings Rate
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P.S.: The following updates are added after the above article was published on 07Mar2022 >
Update 25May2024:
As noted earlier on 10Nov2023, RBI and Govt of India seem to have a taken a strategic decision to bring back physical gold held abroad (in safe custody of Bank of England and Bank for International Settlements) to India.
A careful reading of the data (Table 2 below) indicates: Between Mar2022 and Mar2024, total gold holding rose by 61.7 metric tonnes, while gold held in India increased by 112.5 tonnes; which clearly shows at least 50 metric tonnes of gold was moved from vaults abroad (Bank of England and Bank for International Settlements) to vaults in India.
Russia invaded Ukraine on 24Feb2022 -- this prompted the US and its Western allies to inflict heavy economic sanctions on Russia.
Is it a coincidence that RBI's holding of physical gold reserves abroad have started coming down from Mar2022 and the decline in gold held abroad has continued to the present (Mar2024)?.
My educated guess is RBI and Govt of India have taken a strategic decision to move gold away from foreign vaults to domestic vaults; after the US and the West imposed economic sanctions -- like, freezing of Russia's forex reserves, blocking Russia from SWIFT payments network, freezing of assets of Russian oligarchs and others.
Several developing countries are upset that the US has been weaponizing (weaponsing) the US dollar for political purposes. There have been several attempts at de-dollarization also recently.
Maybe, RBI and Govt of India too are serious about de-dollarisation and moving gold from overseas to Indian shores is part of that effort?
Physical gold is held for strategic purposes by RBI / Government of India; it appears they have taken a conscious decision to move gold from foreign shores to India. As gold is a strategic asset, RBI does not resort to any trading in physical gold ever since it bought physical gold (as part of India's foreign exchange reserves) in Oct2009 directly from International Monetary Fund (off-market transaction).
Table 1 shows gold holdings of RBI have been rising steadily since Mar2018. From 560 metric tonnes of gold in Mar2018, the gold reserves have increased by 47 per cent to 822 tonnes by Mar2024. The share of gold in India's forex reserves increased from 5% in Mar2018 to 8.2% in Mar2024, though this is lower than the highest at 9.5% (gold as a percentage of total forex reserves in value terms) recorded at the end of Sep2012.
Update 10Nov2023:
Interesting data from RBI:
India brought back gold from abroad to India during Apr-Sep2023 -- during the period, gold held abroad was down by 49.2 tonnes, but gold held in India was up by 71.7 tonnes though total gold reserves increased by only 6.1 tonnes.
Big decision from govt!
This is the first time physical gold held abroad (at Bank of England and BIS) was down, that too by as much as 49 tonnes in six months. Obviously, PM Modi government took the decision to bring it back.
Is this a political decision to create buzz ahead of election season?
Update 04Nov2023:
As per RBI monthly Bulletin for Oct2023, India's gold holdings are at 800 metric tonnes as of 30Sep2023, increased from 785 tonnes a year ago. Gold reserves (in US dollar terms) as a percentage of total forex reserves increased to 7.5 percent from 7.1 percent a year ago.
Update 07Nov2022:
04Nov2022 RBI press release: 39th Half Yearly Report on Management of Foreign Exchange Reserves: April-September, 2022 - RBI forex reserves
- RBI has got two intervention currencies - the US dollar and Euro
- Changes / movements in RBI's foreign currency assets (FCA) occur mainly due to:
1) purchase and sale of forex by RBI (daily intervention in forex markets by RBI to "smoothen volatility")
2) income from forex reserves deployed abroad
3) external aid receipts of Govt of India
4)
changes on account of revaluation of assets (recent fall of Euro and
British Pound versus the US dollar is one of the main reasons for the
steep fall in India's forex reserves, which are denominated in US
dollars -- aggressive sale of forex by RBI between Mar2022 and Aug2022
to defend Indian rupee from falling against the USD is another reason
for big drawdown of forex reserves)
- On a balance of payments basis (i.e., excluding valuation effects),
foreign exchange reserves increased by US$ 4.6 billion during April-June
2022 as compared with increase of US$ 31.9 billion during April-June
2021. Foreign exchange reserves in nominal terms (including valuation
effects) decreased by US$ 18.2 billion during April-June 2022 as
compared with increase of US$ 34.1 billion in the corresponding period
of the preceding year.
- Adequacy of reserves:
1) At end of June 2022, foreign exchange reserves cover of imports (on
balance of payments basis) declined to 10.4 months from 11.8 months at
end-March 2022.
2) The ratio of short-term debt (original maturity) to reserves, which was
20.0 per cent at end-March 2022, increased to 22.0 per cent at end-June
2022.
3) The ratio of volatile capital flows (including cumulative portfolio
inflows and outstanding short-term debt) to reserves increased from 66.6
per cent at end-March 2022 to 67.6 per cent at end-June 2022.
RBI's Gold Holdings and Forex Reserves (updated data as on 30Sep2022) >
References:
RBI 39th HY Report on Mgmt of Forex Reserves 04Nov2022
Russia Sanctions: Climbing the Escalation Ladder - Feb2022 - Institute of International Finance
Tweet thread 24Jan2021
RBI Half-yearly Report on Forex Reserves
RBI Weekly Statistical Supplement
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