HEDGE AGAINST FOREIGN CURRENCY RISKS ; RBI buys 8.7 tonne of gold in Jan, highest in nearly 2 years

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THE RESERVE BANK of India (RBI)

bought 8.7 tonne of gold in Janu- ary, making it the largest purchase by the central bank since July 2022. The RBI’s gold holding has climbed to 812.3 tonne in January, from 803.58 tonne in December 2023, according to the World Gold Coun- cil data. The central bank is adding gold to diversify its forex reserves and hedge against foreign currency risks, say experts.

 

“The RBI is strategically increas- ing gold reserves as part of its forex diversification efforts,” Madan Sab- navis, chief economist, Bank of Bar- oda, told FE. “With the recent surge in dollar volatility and the upward trajectory of gold prices, this move not only enhances the stability of India’s foreign exchange reserves, but also makes it a prudent finan- cial decision.”

 

The RBI started buying gold from the calendar year 2018. Before that, it had purchased 200 tonne in 2009 during the global financial crisis. The central bank has added

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Turkey, China and Kazakhstan also bought significant volume of yellow metal in January. Turkey bought 11.8 tonne of gold, China purchased 10 tonne and Kaza- khstan bought 6.2 tonne.

 

 

Central banks across the world have aggressively been adding gold

8.73

East war drags on. Gold, often sought as a safe store of value in times of economic turmoils, bene- fits from the US central bank eas- ing as it pushes down bond yields and the dollar, making the metal more attractive.

 

 

January 2024

nearly 17.7 tonne in the first 10 months of the current financial year.

to their foreign exchange reserves over the past five years to hedge for eign currency risks.

Gold prices have moved upcon- sistently over the last one year and hit a fresh high of ₹65,000 per 10 gram last week, as traders ramped up bets of a start to interest-rate cut by the US Federal Reserve in June, with investors pouring money into the safe-haven asset as the Middle

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“The RBI is buying gold as a measure to diversify its foreign exchange reserves. In a volatile and an uncertain market, most of the reserve currencies are subject to changes, and hence diversification through gold holdings is an appro- priate strategy,” said Vivek lyer, partner, Grant Thornton Bharat. “Further, the status of dollar as a global reserve currency for settle- ment is in question with various geopolitical uncertainties warrant- ing non-dollar bilateral settlement of currencies. So, gold is a good bet to hold during these times,”

 

lyer said. The government on Wednesday issued a notification which allows the RBI to import gold without pay- ing levies. Generally, import of gold attracts 15% import duty, includ- ing 5% agriculture infrastructure development cess.

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