India’s love of gold had earned it the epithet of ‘The Golden Sparrow’ in ancient times, which continues to be relevant as the Reserve Bank of India (RBI) ranks amongst the top gold buyers amongst central banks, globally.

However, RBI’s affinity towards the yellow metal seems to be waning, in recent times at least, when the world has gone on a gold buying spree. Of total gold purchased by Central Banks in 2020 and 2021, the RBI bought 15.26% and 16.63%, respectively. In 2022, however, the RBI purchased a mere 2.9%, or 33 tonnes, out of 1,136 tonnes gold bought by the central banks in the year.

The RBI’s disinterest in gold continues in the first quarter of 2023 as it purchased merely 3% or 7 tonnes of 228 tonnes of gold purchased by central banks globally.

Quite contrary to RBI, in 2022, central banks across the globe tanked up their coffers with the yellow metal as the world witnessed the biggest extravaganza of gold buying since 1967. Central banks had bought 1,404 tonne of gold in 1967 when global finance followed the diktats of Bretton Woods protocol and the US dollar was backed by the yellow metal.

In times of rising geo-political uncertainties, higher inflation, rising interest rates and sweeping de-dollarisation trend, central banks’ affinity towards gold increased considerably and it got reflected in the buying pattern of these banks. In 2020 and 2021, global central banks bought 273 and 463 tonne of gold, respectively, but in the last 2 quarters of 2022, central banks cumulatively bought 862 tonne or 126 tonne above the previous two years combined.

While India was among the top five buyers of gold till the third quarter (September quarter) of 2022, the RBI was pushed to the seventh spot in the global central bank gold buyer ranking after a meagre purchase of about 2 tonne in the fourth quarter (December quarter) of 2022.

Two consecutive quarters of abysmally low purchase by India’s central bank raises curiosity about the reasons for the RBI’s reluctance to buy large amounts of gold recently.

Why is RBI gradually moderating its gold purchases?

India’s central bank bought 41.68 tonne, 77 tonne, and 33 tonne of gold in 2020, 2021 and 2022, which corresponds to 15.26%, 16.63% and 2.9% of total gold purchase by central banks. The sudden decline from teens to low single digit percentage within a year reflects the RBI’s drastic change of strategy. Why is the RBI opting for modest purchase of gold when its peers are diversifying foreign reserves by buying gold in large quantities and choosing de-dollarisation?

Gold plays a key role in portfolio diversification of central banks. The RBI gold buying spree matched with rise in India’s forex. As per the RBI data, India’s forex reserves moved up from $580 billion, in December 2020, to $633 billion in December 2021. In the same period, India bought 77 tonne of gold, its second highest purchase since 2009. The purchase was aimed to diversify forex reserves, which contained 60% reserves in US dollar. But the situation reversed between December 2021 and December 2022 when India’s forex reserves declined from $633 billion to $563 billion. This decline was purely on account of weakening rupee and appreciation of the US dollar. The RBI could have found itself on the wrong side of global power dynamics if it had carried on with heavy gold purchases despite fragile rupee that made its historic low in 2022.

World Gold Council’s Gold Demand Trend Report 2022 mentions that the RBI’s intervention in the forex market to support the rupee caused a decline in India’s forex reserves by $70 billion. This decline may have impacted the Bank’s gold buying, the report says.

Thus, it appears that the RBI modest buying could be attributed to volatility in India’s forex reserves on account of weakening rupee and appreciation in the US dollar. In 2022, the rupee lost 10.68% of its value against greenback while India’s forex reserves declined by 11.7% in 2022. Meanwhile, India’s mammoth gold buying occurred in 2021 when the rupee gained 2.4% against US dollar and forex moved up by 9.1% in 2021.

As per the RBI, India’s total forex reserves stood at $588.78 billion, while gold reserves were $45.65 billion by April 28, 2023. On year-on-year basis, India’s forex reserves declined by $8.9 billion due to weak rupee while in the same period gold reserves have moved up by $4 billion. Be it gold or crude, the vital commodities which India imports, the mode of payment is US dollar and it seems that RBI’s current focus is to earn dollar rather than payout in dollar for gold purchases.

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