Why is RBI Increasing Its Gold Reserves Since 2020?

Since 2020, the RBI has added over 200 tonnes of gold to its reserves, taking total holdings to around 817 tonnes (as of early 2025). This move is driven by:

• Diversification of Forex Reserves:
  • Sanctions Risk Mitigation: $300 billion of Russia’s reserves were frozen in 2022. Physical gold remains immune to sanctions.
  • India’s forex reserves (~$640 billion) were largely dollar-heavy. Gold reduces reliance on the dollar and spreads geopolitical risk.
  • Hedge Against Global Uncertainty: Post-COVID disruptions, Russia-Ukraine war, and banking crises have made gold (a “safe-haven” asset) more attractive.
  • Inflation Protection: Global inflation touched 8–10% in major economies (2022), boosting gold’s role as a value preserver.
  • De-Dollarization Trend: Countries like China, Russia, and Turkey are cutting dollar reliance; India is cautiously aligning.

• Global Implications:
  • Central banks bought a record 1,082 tonnes of gold in 2022, marking the highest demand in 55 years.
  • India’s strong forex reserves boost investor confidence, improve creditworthiness, and reduce borrowing costs.
  • Diversification into gold, yuan, and euro is gradually reducing the US dollar’s 59% share in global reserves.

• Drawbacks of Higher Gold Holdings:
  • Non-Yielding Asset: Gold pays no interest; US Treasury bonds yield ~4–5% annually.
  • Storage and Security Costs: Estimated $100 million+ globally for storage/insurance annually for large gold holdings.
  • Price Volatility: Gold fell by 15% between mid-2020 and 2022 before recovering, exposing reserves to market swings.
  • Liquidity Challenges: Selling physical gold is slower and costlier than liquid dollar assets.

• Impact on the Rupee and Public:
  • Lower dollar reserves limit RBI’s ability to support the rupee, pushing INR from ₹73/USD (2021) to ₹83/USD (2024).
  • Domestic gold prices surged from ₹48,000 to ₹65,000 per 10g (2021–2024), making jewelry more expensive for consumers.
  • A weaker rupee inflates import costs, raising prices of petrol, electronics, and medicines due to heavy crude oil dependence.
  • To curb inflation, RBI may hike interest rates, increasing EMIs on home, auto, and education loans.

So, RBI’s gold accumulation strengthens India’s resilience against global shocks but must be balanced carefully. Gold should complement, not replace, liquid dollar reserves to maintain economic stability and protect the rupee.