The Reserve Bank of India’s (RBI) gold reserves have touched 794.64 metric tonnes in fiscal 2023, an increase of nearly 5% over fiscal 2022. This is part of the RBI’s diversification process, as gold is considered a more safe, secure, and liquid asset to safeguard its returns amid global uncertainty and a rising inflation scenario.

Why are these reserves increasing?

As of March 31, 2023, the country’s total foreign exchange reserves stood at $578.449 billion, and gold reserves were pegged at $45.2 billion. In value terms (USD), the share of gold in the total foreign exchange reserves increased from about 7% at the end of March 2022 to about 7.81% at the end of March 2023.

The RBI has been stepping up its gold purchases over the last few years in order to diversify its overall reserves. This change in strategy has been driven by negative interest rates in the past, the weakening of the dollar, and growing geopolitical uncertainty. Central banks want security, safety, liquidity, and return, and gold provides these qualities.

Why is the RBI purchasing so much gold?

There are two key drivers of central banks’ decisions to hold gold: its performance during times of crisis and its role as a long-term store of value. During times of crisis, such as economic turmoil, war, or political instability, gold has traditionally performed well as a safe haven asset. Additionally, gold is a long-term store of value, meaning it holds its value over time, making it a reliable asset to hold in a central bank’s reserves.

Gold is also a safe asset to have as it is liquid, has an international price that is transparent, and can be traded anytime. Unlike other assets, such as stocks or real estate, gold does not have a specific set of financial or legal rules that govern its ownership, making it a more secure asset to hold.

Important Points:

  • 🏦 The RBI’s gold reserves increased by nearly 5% in fiscal 2023 to 794.64 metric tonnes.
  • 💰 Gold is a safe, secure, and liquid asset that provides security, safety, liquidity, and return.
  • 💸 As of March 31, 2023, the country’s total foreign exchange reserves stood at $578.449 billion, and gold reserves were pegged at $45.2 billion.
  • 📈 In value terms (USD), the share of gold in the total foreign exchange reserves increased from about 7% at the end of March 2022 to about 7.81% at the end of March 2023.
  • 🔄 The RBI has been stepping up its gold purchases over the last few years in order to diversify its overall reserves.
  • 📉 This change in strategy has been driven by negative interest rates in the past, the weakening of the dollar, and growing geopolitical uncertainty.
  • 💪 There are two key drivers of central banks’ decisions to hold gold: its performance during times of crisis and its role as a long-term store of value.
  • 🔒 Gold is a secure asset to hold because it does not have a specific set of financial or legal rules that govern its ownership.
  • 💼 Gold is a reliable asset to hold in a central bank’s reserves as it holds its value over time.
Why In News

RBI’s Gold Reserves Grow by Nearly 5% in Fiscal 2023, Reaching 794.64 Metric Tonnes – its Highest in Decades.

MCQs about A Safe, Liquid, and Reliable Asset for Central Banks

  1. What is the reason behind the increase in RBI’s gold reserves?
    A. To diversify its overall reserves and safeguard returns amid global uncertainty
    B. To reduce the country’s dependence on foreign exchange reserves
    C. To invest in a more profitable asset class than stocks and bonds
    D. To meet the demand for gold among domestic consumers
    Correct Answer: A. To diversify its overall reserves and safeguard returns amid global uncertainty. The RBI has been adding gold to its reserves as part of a diversification process to safeguard its returns amid global uncertainty and a rising inflation scenario.
  2. What is the primary role of gold in central banks’ decision to hold it in their reserves?
    A. It provides a high return on investment
    B. It serves as a reliable asset during times of crisis
    C. It helps in maintaining a stable exchange rate
    D. It reduces the need for foreign exchange reserves
    Correct Answer: B. It serves as a reliable asset during times of crisis. According to the essay, the two key drivers of central banks’ decisions to hold gold are its performance during times of crisis and its role as a long-term store of value.
  3. What are the advantages of holding gold as a reserve asset for central banks?
    A. It is a speculative asset that provides high returns
    B. It is not subject to financial or legal rules that govern ownership
    C. It helps in reducing inflationary pressures
    D. It reduces the need for foreign exchange reserves
    Correct Answer: B. It is not subject to financial or legal rules that govern ownership. The essay explains that gold is a secure asset to hold because it does not have a specific set of financial or legal rules that govern its ownership.

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