Context:
Share of gold in India’s forex reserves doubles in four years, central bank report shows
India’s Gold Reserves & Foreign Exchange Holdings:
- RBI’s Gold Holdings: The Reserve Bank of India (RBI) has increased the share of gold in its foreign exchange reserves to 11.70% (879.59 metric tonnes).
- Components of Forex Reserves: India’s gross foreign exchange reserves include:
- Foreign Currency Assets (FCA)
- Gold held by RBI
- Special Drawing Rights (SDRs)
- Reserve Position in the International Monetary Fund (IMF)
- IMF Reserve Position: Some countries exclude Reserve Position in IMF from forex reserves since it may not be instantly accessible for liquidity needs.
Why Central Banks Are Hoarding Gold:
- Diversification Away from the US Dollar – Reduces exposure to potential devaluation of the US dollar.
- Balances foreign reserves by including a stable asset like gold.
- Hedging Against Inflation – Protects purchasing power as gold retains intrinsic value, unlike fiat currencies.
- Serves as a safe haven asset during inflationary phases.
- Mitigating Geopolitical Risks – Rising global tensions among major powers (US-China-Russia) increase economic uncertainty.
- Gold is considered safer than government-issued bonds or fiat currencies.
Risks Associated with Storing Gold:
- Reduced Liquidity & Flexibility – Converting gold into cash during emergencies is slower and more expensive compared to liquidating foreign currency assets.
- Zero Yield – Gold does not generate interest or dividends, unlike treasury bonds or bank deposits.
- It remains a passive asset unless sold or leveraged.
- Storage & Security Costs – Gold requires secure vaults for storage, often located in India or overseas (e.g., Bank of England).
- Additional expenses for insurance, transportation, and physical protection.
Source: ET
Previous Year Question
What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?
1. To bring the idle gold lying with Indian households into the economy.
2. To promote FDI in the gold and jewellery sector.
3. To reduce India’s dependence on gold imports.
Select the correct answer using the code given below:
[UPSC Civil Services Exam – 2016 Prelims]
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (c)