Here’s why Reserve Bank of India may be looking to boost its gold reserve

• Reports say that the RBI is looking to hike its gold reserves to 10% of its total reserves as opposed to the current 6.5%.
• A Central Bank buys gold for the same reason that households do. It’s a safe investment.
• Whenever there is a fear of a crisis, RBI buys either gold or US dollars – the world’s two safest bets.

An Indian TV channel, ET NOW, reported citing sources that the Reserve Bank of India is looking to increase its reserves of gold substantially. According to the report, the RBI is looking to hike its gold reserves to 10% of its total reserves as opposed to the current 6.5%.

1. Why does the RBI want to buy gold?

A Central Bank buys gold for the same reason that households do. It’s a safe investment.Inflation does not reduce the value of gold neither does an economic crisis.RBI had recently indicated the red expects inflation to remain very high in the coming months and before cooling down by the end of the financial year in March. The coronavirus crisis has also caused a huge dent in India’s economic growth potential.

2. Why is gold a safe investment?

Shoring up gold will be a defence against this crisis combined with the possibility of inflation. China has been shoring up gold reserves for 7 straight months now.Whenever there is a fear of a crisis, RBI buys either gold or US dollars – the world’s two safest bets. India already has over $538 billion in US dollars and the RBI may feel that it has enough dollars in the kitty. If something were to go wrong in the US (E.G election, trade war with China or an actual war) and that leads to the weakening of the dollar, then that would mean the existing foreign exchange reserve will be worth less.

3. Is this a sign that the current crisis will definitely worsen?

The RBI may be taking a precautionary move if the economic crisis or inflation explodes in the coming months.”Headline inflation may remain elevated in till September, but may moderate in the second half of the year aided by large favourable base effects,” RBI said after its latest monetary policy review.

Courtesy: Business Insider