RBI buys gold for the first time in 9 years to diversify assets
The RBI's move signals that gold could be in demand as a store of value given the declining returns and capital values of fixed-income bonds in a rising interest rate environment.
The RBI, in its latest annual report, highlighted that it had added 8.46 metric tonnes of gold during the last fiscal. The bank now holds total 566.23 metric tonnes of gold. The purchase was made to diversify India's foreign currency assets.
"As on June 30, 2018, the Bank holds 566.23 metric tonnes of gold as compared to 557.77 metric tonnes as on June 30, 2017," the report said."Diversification of India's Foreign Currency Assets continued during the year [2017-18] with attention being ascribed to risk management, including cyber security risk. The gold portfolio has also been activated," it added.
The last time the apex bank had bought the yellow metal was in November 2009, when it purchased 200 metric tonnes from the International Monetary Fund (IMF) under its limited gold sales programme in order to boost reserves.
Although the RBI Act permits the regulator to trade in gold, it does not regularly do so, unlike other central banks like People's Bank of China and the Bank of Russia.
According to The Economic Times, the RBI's move signals that gold could be in demand as a store of value given the declining returns and capital values of fixed-income bonds in a rising interest rate environment. Besides, global uncertainties and emerging markets volatility, gold emerges as a safe haven asset.
The daily added that over the past nine years, the gold stock in RBI reserves remained stable at 17.9 million troy ounce. But, as per data submitted to the IMF, since December 2017 the apex bank has been adding to its stock. The latter has gone up from 17.9 million troy ounce in November 2017 to 18.20 million troy ounce, equivalent to 566.23 metric tonnes, in end June. However, the RBI did not say where it bought the gold from or the purpose behind it.
"The addition of gold to RBI's forex reserves is probably a diversification of assets for their deployment, keeping in mind both the build-up of reserves in 2017 as well as the evolving global risks, including market volatility and rising policy rates in the US," Saugata Bhattacharya, chief India economist at Axis Bank, told the daily.
According to experts, investing in gold is a sensible move at a time of rising US yields. According to US treasury department data, the RBI has already sold close to $10 billion worth US treasury securities between April and June. Furthermore, over 60% of the RBI's total reserves totalling $405 billion are reportedly held in the form of bonds and securities. So rising yields could trigger mark-to-market losses for the central bank's bond portfolio.Citing economists, the daily added that the RBI might also want to create a buffer to meet the redemption needs of Gold Bond Schemes through which it sold bonds worth more than Rs 4,000 crore. The RBI has to redeem the three- to eight-year bonds at the prevailing price of the metal and keep an extra stock of gold in its kitty to hedge against price risks.
Edited by Sushmita Choudhury