DIVERSIFYING ITS ASSETS Investing in gold is a prudent treasury move by the central bank at a time of rising yields. The Reserve Bank of India (RBI) has bought gold for the first time in nearly a decade, signalling that the metal could be in demand as a store of value when returns and capital values of fixed-income bonds are declining in a rising rate environment.
The RBI added 8.46 metric tonnes of gold to its stock of holdings during the financial year 2017-18 that ended June 30, taking the level of gold reserves to 566.23 metric tonnes, according to its latest annual report. It last bought 200 metric tonnes from the IMF to boost its reserves in November 2009. Over the past nine years, the gold stock in RBI reserves was stable at 17.9 million troy ounce. But RBI has started adding to its stock since December 2017, data submitted to the IMF indicate.
Stock of gold, as of June 30, amounted to 18.20 million troy ounce or equivalent to 566.23 metric tonnes, up from 17.9 million troy ounce in November, 2017. The RBI’s decision to buy gold is significant because unlike many other central banks such as the People’s Bank of China, RBI does not regularly trade in gold, although the RBI Act permits it to do so. Economists reckon that investing in gold is a prudent treasury move by the central bank at a time of rising yields. RBI has already sold close to $10 billion worth US treasury securities between April and June, data with the US treasury department suggest.
“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,” said Saugata Bhattacharya, chief India economist at Axis Bank. Rising yields could trigger mark-tomarket losses for RBI’s bond portfolio. Of the $405 billion worth reserves with the central bank, $245 billion were held in the form of bonds and securities as of June 30, data submitted to the IMF show.
Diversifying reserves to include gold is a prudent measure at such times. The Annual Report points out that RBI continued diversification of foreign currency assets with attention to risk management. The gold portfolio had also “been activated,” said Bhattacharya. The RBI did not say where it bought the gold from or the reasons for such transactions. But economists say that the central bank might also want to create a buffer to meet the redemption needs of Gold Bond Schemes through which it sold bonds worth more than ?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.
The Economic Times,3rd September 2018
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