Reserve Bank of India Gold Holdings
(Updates 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.
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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 >
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:
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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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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