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Global Monetary Policy Might Compel RBI To Augment Its Gold Reserves

"There are concerns that this huge debt might lead to a reset of the dollar which would have major consequences for central banks holding reserves in dollar. Therefore, gold purchase by central banks is by way of diversification"

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However, even 29 years after that fateful incident, gold is still revered as a safe haven for the country's central bank. Pixabay

Rising trade protectionist measures along with threat of a currency shock and dovish global monetary policy might compel India’s central bank to augment its gold reserves.

Additionally, the need to have a diversified foreign currency and asset reserve will keep the Reserve Bank’s gold deposits glittering, opined economists and industry watchers.

The trend, they said, has led the country’s central bank to increase its gold reserves to 608.8 tonnes.

As per World Gold Council, India’s central bank holds the 11th largest gold reserves in the world as of May, in comparison, the US reserves are pegged at 8,133.50 tonnes, Germany (3,369.70), IMF (2,814), Italy (2,451.80), France (2,436) and Russia (2,168.3).

“Ongoing trade tensions and economic sluggishness remain the driving factors behind this continued diversification through gold,” said Alistair Hewitt, Director of Market Intelligence at the World Gold Council on the trend of gross purchases by four central banks.

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“Gold’s role as a safe haven asset and an effective portfolio diversifier makes it a good medium-term investment choice,” said Madhavi Arora, Economist, Edelweiss Securities’ FX and Rates desk. Pixabay

India’s forex reserves comprise Foreign Currency Assets (FCAs), gold reserves, Special Drawing Rights (SDRs) and India’s reserve position with the International Monetary Fund (IMF).

Latest data had shown an increase of $4.368 billion in overall reserve during the week ended April 26 to $418.515 billion.

According to Anindya Banerjee, Deputy Vice President for Currency and Interest Rates with Kotak Securities: “RBI is maintaining a share of 5-6 per cent of its total reserves in gold. As the reserves rose, RBI has increased the amount of gold it is holding, without increasing the share.”

The RBI’s weekly data had showed that the value of the country’s gold reserves was stagnant at $23.303 billion.

In the view of Tapan Patel, senior analyst, commodities, HDFC Securities, higher gold reserves guarantees asset diversification in terms of de-dollarisation to counter the volatile currency fluctuations amid strong foreign inflows.

“The global economic uncertainties pertaining to trade war, dovish US FED and lower interest rates has prompted India’s RBI to increase gold buying diverting to safer assets. However, we expect RBI will try to keep gold reserves steady around 6.50% of overall reserves kitty and maintain the ratio of foreign currency and gold reserves.”

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Additionally, the need to have a diversified foreign currency and asset reserve will keep the Reserve Bank’s gold deposits glittering, opined economists and industry watchers. Pixabay

Lately, concerns have been raised over the impact of US debt level of around $22 trillion on the greenback.

“There are concerns that this huge debt might lead to a reset of the dollar which would have major consequences for central banks holding reserves in dollar. Therefore, gold purchase by central banks is by way of diversification,” V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

On a nostalgic note, for gold’s value as the country’s ultimate saviour, Indians still remember the time when the government had to pledge India’s gold reserves with IMF in 1990-91

However, even 29 years after that fateful incident, gold is still revered as a safe haven for the country’s central bank.

Also Read: Do You Know How India Buried The Domestic Terror Time Capsule? Read Here To Find Out

“Gold’s role as a safe haven asset and an effective portfolio diversifier makes it a good medium-term investment choice,” said Madhavi Arora, Economist, Edelweiss Securities’ FX and Rates desk.

“Besides, gold’s ability to improve risk-adjusted returns and its use as valuable collateral are also factors that makes it relevant for central bankers to invest and diversify in gold.” (IANS)

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RBI May Recoup Reserves, Strong Inflow of Foreign Funds And Benign Oil Prices Strengthening Indian Currency

A major factor supporting the rupee is the strong prospect of better fund flows from abroad.

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Experts now see a chance for the RBI to recoup the reserves it spent in 2018 defending the rupee. Pixabay

A strong inflow of foreign funds and benign oil prices have strengthened the Indian currency but what has worked best for the rupee is the fading impact of war hysteria. Experts now see a chance for the RBI to recoup the reserves it spent in 2018 defending the rupee.

Putting a number to this, Gurang Somaiya, currency analyst at Motilal Oswal, said: “It is possible that RBI may limit some of the appreciation and recoup some of its lost reserves… but it may only come if the rupee strengthens to around Rs 68.20 a dollar.”

Explaining the factors at play, Anindya Banerjee, Deputy Vice President for Currency and Interest Rates with Kotak Securities, said: “Post-Abhinandan (shooting down of the IAF pilot), geopolitical risk has subsided which has boosted investor sentiments.”

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The decline in crude oil, which accounts for a large import bill for India, directly affects the exchange rates.
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Banerjee added that the gains of the rupee will help the Reserve Bank of India recoup reserves which it lost last year in a bid to arrest its fall.

“The rupee appreciated and closed at 70.14 for the last week on the back of strong flows and fading impact of war hysteria,” said Sajal Gupta, Head Forex and Rates, Edelweiss Securities.

In addition, Gupta said that some “big flows are lined up next week. Maybe Arcelor Mittal money can hit the Indian markets which can lead to some more appreciation towards 69.50 unless the RBI intervenes”.

However, the rising dollar index is causing nervousness and any breakout may lead to a reversal in the rupee’s trend, said Gupta. Somaiya said that RBI may choose not to intervene as the central bank’s prime aim was to arrest volatility.

“Yes the rupee is inching below the 70-a-dollar mark but then the (general) election can cause massive volatility. Also, it is seen that a lot of central banks are getting into a dovish stance owing to the fears of global slowdown.”

The RBI had to stop the slump in the rupee late last year after it touched an all-time high of 74.47 on October 11 following the rising crude oil prices.

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However, the rising dollar index is causing nervousness and any breakout may lead to a reversal in the rupee’s trend, said Gupta. Somaiya said that RBI may choose not to intervene as the central bank’s prime aim was to arrest volatility. Pixabay

The Brent Crude touched $86-a-barrel mark in early October but started to ease following the US decision to exempt 8 countries, including India and China, to continue buying oil for six months from Iran despite sanctions.

The decline in crude oil, which accounts for a large import bill for India, directly affects the exchange rates.

A major factor supporting the rupee is the strong prospect of better fund flows from abroad.

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“Inflows into India have clearly turned positive since the end of January. The flows in February at Rs 17,720 crore is the highest since November 2017. The trigger for this inflows is the dovish statement that came from the Fed at the end of January,” said V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

India’s foreign exchange reserves stood at $401.78 billion as against $393.13 billion in November last year. As the data suggests, with improving macros, the forex is already on the recovery path. (IANS)