India's foreign exchange reserves fell by $5.7 billion to $634.59 billion for the week ended January 3, data released by the Reserve Bank of India (RBI) on Friday showed.
However, gold reserves, which form part of the foreign exchange kitty, increased by $824 million to $67.1 billion during the week, according to the figures.
In November 2024, the RBI purchased another 8 tonnes of gold. As central banks went on a shopping spree, globally, they acquired 53 tonnes of the metal in the same month, a report by World Gold Council suggests.
The RBI, like other central banks, has been buying gold as a safe-haven asset. The strategy of holding gold is primarily aimed at hedging against inflation and reducing foreign currency risks, especially in times of uncertainty triggered by geopolitical tensions.
With an addition of 8 tonnes of gold in November, the RBI has added its buying to 73 tonnes for the first 11 months of 2024 and taken the total gold holding to 876 tonnes.
With this, the RBI maintained its position as the second largest buyer during the year after Poland.
"Gold is up 1.3 per cent and Silver is up more than 3 per cent so far in the weak, despite a stronger U.S. dollar in the overseas market. The bullions have remained supported by safe-haven buying ahead of January 20 - the day Donald Trump starts his Presidency and focus will remain on his policy layout, while additional support is seen from fresh buying among ETF investors," said Pranav Mer, Vice President at JM Financial Services Ltd.
The RBI makes use of the forex reserves to curb the volatility in the rupee which occurs as hot money from the stock market flows out when foreign investors sell shares.
Reserve Bank Deputy Governor Rabi Sankar said at a media event on Thursday that the RBI is well equipped to handle excessive exchange rate volatility that could result as a fallout of the Trump presidency.
He also ruled out allowing oversight rights of the Indian bond-clearing platform to the European authorities, comparing such a provision to a sovereignty breach.
The RBI puts out dollars into the market to avert it from falling into a free fall. This enables rupee to gain stability in Indian currency. Adequate foreign exchange reserves enable this process and the rupee will be stabilized too.
