India in global gold buying spree; RBI 2nd largest buyer of yellow metal

When it comes to gold buying, the Reserve Bank of India (RBI) emerged as the second largest buyer of yellow metal among the world's Central Banks in 2021. The largest buyer, the Central Bank of Thailand, bought 90 metric tonnes of gold while RBI bought 77.5 metric tonnes taking its total gold reserve to 754.1 tonnes at the end of December 2021. India’s official gold reserves is ninth largest in the world, says Goldhub, the official website of World Gold Council that maintains all the data regarding precious metal (see table).

The charm of the yellow metal has captivated RBI, which has been on a gold buying spree since 2009. The purchase in last calendar year is the second highest annual level of buying in the new millennium. In 2009, India bought 200 tonnes of gold from the International Monetary Fund (IMF).

At the end of December 2021, RBI gold reserves stood at 754.1 tonnes, which amounts to 6.22 per cent of India’s forex reserves. As per RBI data, India’s total reserves at the end of December 31, 2021 stood at $633.61 billion, including gold reserves worth $39.405 billion.

On an incremental basis too, RBI is buying more gold. In 2020, RBI bought 41.68 tonnes of gold while in 2019, it bought 34.52 metric tonnes of gold. At the end of 2020, the central bank’s yellow metal reserves stood at 676.6 tonnes, translating into 6.9 per cent of RBI’s total reserves.

In 2021, RBI’s gold buying spree occurred in the backdrop of falling prices of gold in global markets. During uncertain economic conditions, gold price takes an upward trajectory and this was evident in the previous year in 2020, when Covid-19-induced economic turmoil led to gold price touching an all time high of $2,067 per ounce. Since then, GDP across the globe has picked up and the demand for the yellow metal has reduced as economic stability returned. Prices declined consistently in 2021, with gold currentlty trading at $1,818 per ounce.

Why RBI is on a gold buying spree?

Why is the RBI buying gold when there is tepid global demand for the yellow metal? For one, the economic outlook for 2022 looks uncertain as inflation around the world is inching up. During an inflationary period, gold creates a fine balance in central banks’ overall reserves as rising global inflation means decline in the value of all major currencies, including the U.S. dollar.

According to RBI, at the end of March 2021, its total forex reserves were $576.98 billion, in which $536.6 billion were held as foreign currency assets (FCA). As the U.S. dollar is perceived to be the world's reserve currency, the majority of India’s FCA are in U.S. treasury bills and U.S. treasury bonds. In an inflationary environment, any decline in the value of the U.S. dollar would adversely impact India’s forex reserves. Any dollar weakness would have a profound impact on the current account balance of a commodity-importing nation like India. A plunge in the value of a fiat currency like the U.S. dollar or Euro could be countered by raising gold reserves.

Moreover, due to high debt in every major economy, central banks of these nations are not able to raise interest rates. Lower nominal interest rates along with rising inflation is creating buoyancy in precious metals markets as investors are more willing to park money in gold and silver than in advanced nations' bonds that are yielding negative or insignificant rates.

Every major central bank keeps a portion of its reserves in gold as the metal plays the role of a hedging instrument in times of uncertainty and economic turmoil. During the balance of payment crisis in 1990-91, the Indian government had pledged 67 tonnes of gold to the Bank of England and Union Bank of Switzerland.

Who else is buying gold?

Is RBI alone in buying gold to diversify its reserves? No. Central banks across the world collectively bought 463 tonnes of gold in 2021 according to the Goldhub report published on January 28, 2022. This marks a significant rebound in demand from central banks following the decade low of 255 metric tonnes in 2020. Buying was heavily front loaded and 324 metric tonnes of gold was bought during the first half of the year. Last year was the twelfth consecutive year of net purchases, during which time central banks have bought a net total of 5,692 tonnes, the Goldhub report mentions.

According to data from the IMF, global central banks gold reserves rose to just shy of 35,600 tonnes during 2021, the highest level since 1992.

In 2021, The Central Bank of Thailand emerged as the biggest buyer with 90 tonnes of buying, Hungary bought 63 tonnes over the year, tripling its gold reserves, Brazil bought 62 tonnes, while Uzbekistan and Kazakhstan added 30 tonnes and 15 tonnes, respectively.