Share of US treasury in RBI reserves shrink, gold sees an increase

The data on holdings of US treasury certificates is sourced from the December bulletin of markets regulator Securities and Exchange Board of India (Sebi), which cites the US Department of the Treasury. The aggregate foreign exchange reserves data is from RBI. While India’s total holding of US treasury securities rose 7.8% year-on-year (y-o-y) to $229.1 billion in September, its share in RBI’s aggregate forex reserves shrank about one percentage point to 39%.

On the other hand, the share of gold in total reserves rose to 7.45% at the end of September, as compared to 7.05% in September 2022. The total value of gold in reserves was at $43.7 billion at end-September and has since increased to $47.6 billion as on 15 December.

Mint reported on 19 November that RBI bought nine tonnes of gold in the September quarter, taking India’s official gold reserves to 806.7 tonnes as of September end and placing it at No. 10 in the pecking order, according to miner’s lobby World Gold Council (WGC). India purchased 16.2 tonnes of gold in 2023.

“Central banks continue to buy gold as it has always been part of the reserves and global economic and geo-political context since 2019 imparts a strong case for gold,” said Somasundaram PR, regional chief executive officer, India, World Gold Council.

India has been diversifying its reserves since 2018, when it purchased 42.3 tonnes, 34.5 tonnes in 2019, 41.7 tonnes in 2020, 77.5 tonnes in 2021 and 33.3 tonnes in 2022. China’s central bank has been at the forefront of this diversification exercise, having purchased a whopping 204 tonnes of gold in 2023, from just 62.2 tonnes last year.

“I would tend to think that this change that we have seen in the holdings of foreign exchange reserves is more as a part of RBI’s diversification strategy. There has been quite a bit of volatility in the last couple of years in terms of the assets held by various central banks, including the dollar which both strengthened and weakened over a period,” said Madan Sabnavis, chief economist, Bank of Baroda.

Sabnavis said gold prices have seen an upward movement, a phenomenon seen when global conditions are volatile. “I don’t think RBI or other central banks would look to maximize their gains as it is not an important consideration given that returns from these central government bonds are quite low. Instead, the idea is to hold on to reserves which have a stable value,” he said.

Gold prices rose 11.3% y-o-y to $1848.63 an ounce (31.10 grams) as of 29 September this year, according to data from Bloomberg . This is excluding the import duty of 15% charged by India for bringing gold into the country.

Others expect the value of bonds held by the RBI to increase with global interest rates having peaked. In fact, the US Federal Reserve recently indicated three possible rate cuts in 2024, leading to the US 10-year benchmark bond yield falling below 4%, for the first time since August.

“The base case is for the interest rate cycle to decline in 2024 and a soft landing for the US economy,” said DK Joshi, chief economist at Crisil. “With yields likely to come off, the value of the outstanding treasuries held will also rise.”