Winning Bizness Desk
Mumbai. In the last few years, the Reserve Bank has bought gold in a big way. Between April 2020 and September 2022, RBI bought 132.34 tonnes of gold. During this period, no central bank in the world bought so much gold. At the same time, RBI is the world's third largest gold buyer with 17.46 tonnes of purchases in 2022. The Reserve Bank of India ranked ninth in terms of gold reserves with 785.35 tonnes by September 2022. Between April 1, 2018 and September 30, 2022, the RBI increased its gold reserves by 225.03 tonnes. In the September quarter, central banks around the world bought more than 400 tonnes of gold, which is 4 times more than a year ago. RBI was the world's third largest gold buyer by buying 17.46 tonnes of gold this year.
Dealing with inflation
Central banks around the world are buying gold after the tremendous strength in the dollar. The main reason for buying gold by central banks of most countries including RBI is the strategy to deal with inflation. The value of currency decreases when inflation increases, while that of gold increases. Apart from this, gold reserves are also kept for security amid uncertainty.
Why do central banks hold gold?
The central banks hold gold for both historical and macroeconomic purposes. Gold is available in limited quantities compared to other similar metals such as silver and copper. Gold's shine and luck also does not change with time. This means if central banks supply money backed by gold as an asset, it constraints and limits central banks' ability to create money. Hence historically, central banks have held gold and even adhered to the gold standard for many decades. Overtime, gold and the gold standard posed multiple problems for central banks, leading them to hold government securities and foreign exchange assets. Despite the lesser importance of gold, central banks continue to hold the metal for macroeconomic reasons. Gold remains a preferred store of value in case of high inflation and a safeguard against financial emergencies. The central banks also hold gold to hedge against both inflation and financial stability.