RBI: RBI buying gold in a big way to diversify forex assets – The Economic Times

Clipped from: https://economictimes.indiatimes.com/markets/forex/rbi-diversifies-forex-assets-with-42-tonne-gold-purchase-in-fy21/articleshow/82394036.cms

Synopsis–The central bank ended FY21 with a valuation loss of its foreign exchange reserves as US treasury yields, where the bulk of the reserves are parked, have hardened in recent times.

MUMBAI: The Reserve Bank of India bought 42 tonnes (1.36 million troy ounces) of gold in the last fiscal year amid uncertainty on US treasury yields.

The central bank ended FY21 with a valuation loss of its foreign exchange reserves as US treasury yields, where the bulk of the reserves are parked, have hardened in recent times.

But RBI’s gold reserves of 22.35 million troy ounces (around 695 tonnes) is valued at $33.8 billion as of end-March, up $3.3 billion over March 2020, data it submitted to the International Monetary Fund (IMF) showed.

The Reserve Bank of India was the second-largest buyer of gold among central banks after Turkey in FY21, according to a World Gold Council Report.

Many other emerging market central banks that mostly have lower ratios of gold-to-total reserves were seen buying gold during the year, it said. Notable among them are the UAE, Cambodia and many other East European central banks were seen buying gold during the year.

Unlike many other central banks, gold is more of a strategic asset for RBI and it does not actively trade in gold. The Reserve Bank has never sold gold though the RBI Act permits it.

“While safety and liquidity constitute the twin objectives of reserve management in India, return optimisation is kept in view within this framework,” RBI’s latest report on the management of foreign exchange reserves said.

RBI may, however, continue to buy gold as the uncertainty on US treasury yields continues amidst strong capital flows to emerging markets including India.

The Reserve Bank may benefit in terms of valuation of gold reserves if prices move up and may not have to make huge provisions. “The fundamentals point to higher gold prices over the near to medium term,” said Chirag Mehta, senior fund manager, alternative investments, at Quantum Mutual Fund.

World Gold Council said, “The possibility of capital inflows into emerging markets, resulting in higher reserves, and the continued ultra-low interest rate environment, may lead to central banks adding gold for diversification purposes.”

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