Reserve Bank of India Bolsters Gold Holdings, Strengthens Foreign Exchange Reserves

The Reserve Bank of India’s (RBI) latest half-yearly report on foreign exchange reserves management reveals a strategic increase in gold holdings and a strengthening of the country’s overall foreign exchange reserves position. This article delves into the key data points, exploring the implications for India’s financial stability.

Surge in Gold Holdings

The report highlights a significant increase in RBI’s gold holdings during FY24. As of March-end 2024, the central bank held 822.10 metric tonnes of gold, reflecting a rise of 27.46 metric tonnes from the previous fiscal year. This growth represents a 34% increase in total gold reserves compared to March 2019, with domestically held gold reserves witnessing a steeper rise of 40% during the same period. Notably, 408.31 metric tonnes of gold were held domestically at the end of March 2024, demonstrating a commitment to bolstering domestic gold reserves.

Impact on Foreign Exchange Reserves

The increase in gold holdings has also contributed to a rise in the share of gold within India’s total foreign exchange reserves. As of March-end 2024, gold accounted for approximately 8.15% of total foreign exchange reserves, up from 7.37% at the end of September 2023. This diversification of reserves strengthens India’s financial position and mitigates risks associated with currency fluctuations.

Improved Import Cover and Debt Management

The report indicates a positive improvement in India’s import cover. By March-end 2024, foreign exchange reserves covered imports (on a balance of payments basis) for 11 months, compared to 9.3 months at the end of March 2023. This enhanced import cover signifies India’s greater capacity to finance imports with its foreign exchange reserves, providing a buffer against external economic shocks.

Furthermore, the report highlights a decline in the ratio of short-term debt to reserves. The ratio decreased from 23.0% at the end of December 2022 to 20.3% by December 2023. This indicates a healthier debt structure with a lower proportion of short-term debt, potentially reducing India’s vulnerability to sudden capital outflows.

Foreign Exchange Reserves Composition and Management

Excluding valuation effects, India’s foreign exchange reserves witnessed a significant increase of USD 32.9 billion during the April-December 2023 period compared to a decrease of USD 14.7 billion in the corresponding period of the previous year. This suggests improved foreign exchange reserves management strategies.

In terms of composition, as of March-end 2024, a total of USD 570.95 billion was held in foreign currency assets (FCA). Out of this, USD 468.99 billion was invested in securities, USD 62.17 billion was deposited with other central banks and the Bank for International Settlements (BIS), and the remaining USD 39.79 billion comprised deposits with commercial banks overseas.

Conclusion

The Reserve Bank of India’s focus on increasing gold holdings and bolstering foreign exchange reserves reflects a proactive approach to financial management. The data indicates a stronger import cover, a healthier debt structure, and improved foreign exchange reserves management. These developments contribute to India’s financial stability and resilience in the face of global economic challenges.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.