Here’s why the RBI bought gold for the first time since 2009

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  • As per its annual report, the RBI bought nearly 8.5 metric tonnes of gold between December 2017 and June 2018.
  • This was the first time that the central bank had bought gold since its purchased 200 million metric tonnes from the International Monetary Fund in 2009.
  • The RBI wants to diversify its foreign exchange reserves as gold is widely considered to be a safe investment when interest rates are rising and global markets experience volatility.
As the rupee continues its free-fall, reaching an all-time low of 71.21 to the US dollar on Monday, India’s central bank will rely on it foreign exchange reserves more so than ever to stabilise the currency.

In anticipation of tough market conditions, it seems that the Reserve Bank of India (RBI) is parking its funds in an all-weather asset in order to diversify its foreign exchange reserves. According to its annual report, the RBI bought nearly 8.5 metric tonnes of gold between December 2017 and June 2018. This brings it overall level of gold reserves, which are an important component of its forex chest, to 566.3 metric tonnes.

This was the first time that the central bank had bought gold since its purchased 200 million metric tonnes from the International Monetary Fund in 2009. The move indicates the RBI’s lack of investment options, especially as returns on its bonds are declining amid higher interest rates.

More than 60% of the RBI’s $400 billion worth of foreign reserves are held in the form of bonds and securities. This makes it vulnerable to rising yields as interest rates increase, which subsequently lower the market value of bonds. Hence, it needs an insurance mechanism to counter risk.

Given gold’s liquidity and rising value during market crashes, it is widely considered to be a safe investment at a time when interest rates are rising and global markets experience volatility, such as in the current scenario where concerns of a trade war between the US and China have riled markets. Unlike other central banks, however, the RBI doesn’t usually trade in gold, indicating a change of pace for the institution.

In the short term, the investment in gold is set to continue. At the end of August, the RBI said it plans to increase its gold reserves in 2018-19 as well. It also said it would look into issuing sovereign gold bonds.
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