RBI’s Gold acquisition and Declining FPI

In News

• Recently, India’s gold holdings have gone up to 760.42 tonnes, with the Reserve Bank of India (RBI) adding another 16.58 tonnes to the country’s foreign exchange.

About the recent trend

• Declining FPI: Apart from gold acquisition, foreign portfolio investors (FPIs) were exiting India and forex reserves declined by $44.73 billion from $642.45 billion to $597.72 billion.
• Gold holdings: While 453.52 metric tonnes of gold are held overseas in safe custody with the Bank of England and the Bank of International Settlements, 295.82 metric tonnes of gold are held domestically.
  • Domestic storage has also grown to 39 per cent of respondents.
  • In value terms (USD), the share of gold in the total foreign exchange reserves increased from about 5.88 per cent to about 7.01 per cent.
• Ninth-largest holder of gold reserves: India’s gold holdings have now gone up by 65.11 tonnes from 695.31 tonnes in 2021 and by 142.18 tonnes in the last two years, making India the ninth-largest holder of gold reserves.
• Gold is the third largest reserve asset globally, following US dollar- and euro-denominated assets.
  • It is also increasingly used as collateral in financial transactions, much like other high-quality, liquid assets like government debt, as per World Gold Council (WGC).

Significance of gold in forex basket

• While gold no longer plays a direct role in the international monetary system, central banks and governments still hold extensive gold reserves to preserve national wealth and protect against economic instability.
• Central banks are buying gold at an ever-increasing pace.
• A sizable gold holding is expected to add stability to the forex reserves at a time when capital outflows are putting pressure on India’s reserves.
• According to the 2021 Central Bank Gold Reserves (CBGR) survey, 21 percent of central banks intend to increase their gold reserves over the next 12 months.
• Central banks are also increasingly valuing gold’s performance during periods of crisis as this attribute now tops their rationale for holding gold.
• Gold has long formed an important part of India’s currency reserves.

What are Forex Reserves? 

• These are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities.
• India’s forex reserves include Foreign Currency Assets (FCA), Gold reserves, Special Drawing Rights (SDR), Reserve Tranche Position with the International Monetary Fund (IMF). 
• Approximately 64 per cent of the foreign currency reserves are held in securities like Treasury bills of foreign countries, mainly the US and around 28 per cent is deposited in foreign central banks and 7.4 per cent is deposited in commercial banks abroad. 
• The forex reserves are managed by the Reserve Bank of India for the Indian government and the main component is foreign currency assets and they act as the first line of defence for India in case of economic crisis. 
• The reserve facilitates external trade and payment and promotes orderly development and maintenance of foreign exchange market in India.

Foreign portfolio investors (FPIs)

• It consists of securities and other financial assets held by investors in another country. 
  • FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds, and exchange-traded funds.
• It does not provide the investor with direct ownership of a company’s assets and is relatively liquid depending on the volatility of the market.
• Along with foreign direct investment (FDI), FPI is one of the common ways to invest in an overseas economy. 
  • FDI and FPI are both important sources of funding for most economies.

Conclusion

• Decline over the past decade: Even with a substantial stock of gold reserves, gold’s share in total reserves had declined over the past decade due to the vast growth in dollar-denominated assets.

Source: IE