Gold is the ultimate security measure for central banks, which can be thought of as national treasure troves. Central banks hold gold bars in reserve to withstand economic downturns, much like we save money for unexpected expenses. This shiny gold serves as a financial anchor, keeping things stable when markets tremble or currencies falter. It’s similar to having shining insurance coverage that never ends!
When foreign nations see a country’s gold vault, it fosters confidence and trust, just like when they see a high credit score. Central banks utilize gold as a fallback option to defend their nation’s financial stability and maintain a stable economy by avoiding placing all of their eggs in the currency basket.
Gold Reserves in March 2024
The proportion of gold in total foreign exchange reserves in value terms (USD) rose from 8.15 percent at the end of March 2024 to around 9.32 percent at the end of September 2024. The RBI possessed 822.10 tonnes of gold as of March 2024; 408.31 tonnes were stored domestically, 387.26 tonnes were held in custody with the Bank for International Settlements (BIS) and the Bank of England, and 26.53 tonnes were held as gold deposits.
Gold Tranche Brought Back
Earlier this year, the RBI had moved 100 tonnes of gold back from the Bank of England, making it the first big move to bring back gold in India after the 1991 pledging of gold to raise money. Now on 31st of October, another 102 tonnes of gold has been brought back by the central bank into the country.
Quantum of Gold held Domestically
RBI now holds 60% of its total gold reserve of 854.73 tonnes domestically. The banking regulator on Tuesday said that in September 2024, it held 854.73 tonnes of gold, of which 510.46 tonnes were held domestically. While 324.01 tonnes of gold were kept in safe custody with the Bank of England and the Bank for International Settlements (BIS), 20.26 tonnes were held in the form of gold deposits.
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Possible Reasons why RBI is Bringing back Gold:
Launch of BRICS Currency
The introduction of a BRICS currency could shift global trade dynamics, prompting the Reserve Bank of India (RBI) to bolster its gold reserves. This move aims to enhance India’s financial positioning and ensure stability in transactions with member countries.
Possible Recession Due to US Inflation
Concerns about a potential recession fueled by headstrong U.S. inflation are driving the RBI to secure gold reserves. As gold acts as a hedge against economic downturns, the central bank could be using this measure to stabilize the Indian economy in the event of any uncertain global financial conditions.
Ticking Chinese Economic Bomb
China’s economic challenges, including potential slowdowns and debt issues, pose risks to global markets. By increasing gold reserves, the RBI aims to protect the Indian economy from possible spillover effects and safeguard against financial instability linked to China.
Strengthening Reserves Against Geopolitical Tensions
Geopolitical tensions, such as those involving Israel-Iran, Russia-Ukraine, North Korea-South Korea, and China-Taiwan necessitate robust financial reserves. The RBI’s focus on gold accumulation helps shield India from potential future economic disruptions resulting from these conflicts and enhances national security.
Improving Credibility for Trading in the Indian Rupee
Enhancing gold reserves improves India’s credibility for international trade conducted in rupees instead of the U.S. dollar. By backing the rupee with tangible assets like gold, the RBI can foster confidence among foreign partners, promoting trade independence and stability. As the government of India
Conclusion
To sum up, it’s fascinating to observe what is going on behind the scenes. Is this a preemptive step to protect the economy from rising geopolitical tensions, or is it a prelude to the BRICS currency’s introduction? What is ahead for the Indian markets will only become clear with time.
Written By: Dipangshu Kundu
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