RBI’s Gold Reserve Increased | 11 May 2020

Why in News

According to the ‘Report on Management of Foreign Exchange Reserves’, the Reserve Bank of India’s total holdings of gold reached 653.01 tonnes in the financial year 2019-20.

• The Reserve Bank of India publishes half-yearly reports on management of foreign exchange reserves as part of its efforts towards enhanced transparency and levels of disclosure.
• These reports are prepared half yearly with reference to the position as at end-March and end-September each year.

Key Points

• The RBI’s total gold reserves were 612.56 tonnes in the preceding fiscal ended March 2019.
• The addition of 40.45 tonnes of gold has raised the value of gold reserves to $30.57 billion by March 2020 from $23.07 billion in March 2019.
• The share of gold in the total foreign exchange (forex) reserves rose from about 5.59% as of March 2019 to about 6.40% by March 2020.
  
  • India’s Forex Reserve include: Foreign Currency Assets, Gold reserves, Special Drawing Rights and Reserve position with the International Monetary Fund (IMF)
• Around 360.71 tonnes of gold is held overseas in safe custody with the Bank of England and the Bank for International Settlements, while the remaining gold is held domestically.
• The gold reserves will help the central banks around the globe to focus on the measures needed to contain the economic impact of Covid-19.
• Gains or losses on valuation of foreign currency assets and gold due to movements in the exchange rates and/or price of gold are booked under a balance sheet head named the Currency and Gold Revaluation Account (CGRA).
  
  • CGRA represents the value of the gold and foreign currency that the RBI holds on behalf of India.
  • It shows funds that are available to compensate RBI’s loss in the value of gold and foreign exchange reserve holdings.
  • The balances in CGRA provide a buffer against exchange rate/gold price fluctuations.

Gold & Economy

• As Currency:
  
  • Gold was used as the world reserve currency up through most of the 20th century. The United States used the gold standard until 1971.
  • The paper money had to be backed up by equal amounts of gold in their reserves.
  • Although the gold standard has been discontinued, some economists feel that we should return to it due to the volatility of the U.S. dollar and other currencies.
• As a hedge against inflation:
  
  • The demand for gold increases during inflationary times due to its inherent value and limited supply. As it cannot be diluted, gold is able to retain value much better than other forms of currency.
• Strength of Currency:
  
  • When a country imports more than it exports, the value of its currency will decline.
  • On the other hand, the value of its currency will increase when a country is a net exporter.
  • Thus, a country that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices increase, since this increases the value of the country's total exports.
    
    • Since, the central banks rely on printing more money to buy gold, they create an excess supply of the currency. This increases the supply and thereby reduces the value of the currency used to purchase it.

Source: IE