Gold Rush: India's Forex Kitty Hits All Time-High In One Week Thanks to Gold

India's forex reserves on a weekly basis were reportedly up by $4.7 billion from the last week to an all-time high of $702 billion. Forex reserves, for the last four months had been hovering between the $694-702 billion mark, but a rally in gold prices seems to have enabled India in reaching a sweet milestone of $702.96 billion.

Forex data maintained by the Reserve Bank on Friday showed a maximum spurt in valuations on Gold or nearly $92 billion. Forex data is updated on a weekly basis. Gold holdings as of the last week were reported at $90.29 billion - indicating an increase of nearly $2 billion. On a volume basis, India's official gold holdings with the Reserve Bank are estimated at 880 metric tonnes.

WHAT ON EARTH IS A FOREX RESERVE?

Forex reserves can be equated to a piggy bank - the bigger its value, higher is the owner's status. However, in the case of a national foreign exchange reserve, this valuation is based on amount of reserve currencies, Gold holdings, Reserve tranche position with the IMF (International Monetary Fund) and special drawing rights.

FOREX RESERVE CRISIS

Nations have faced challenges when their forex reserves shrunk or got depleted. For instance, Sri-Lanka in 2019 faced the Balance of Payments crisis which subsequently caused forex reserves to deplete to alarming levels. Such was the brute force of shrinking forex reserves that many Sri-Lankans had to wait in serpentine queues just to refill for petrol and gas cylinder for cooking. Forex shortage had affected India during July 1991 prompting the apex banking regulator of the country to engage in a "secret-sale" of gold to the tune of 21,000 kilos of Gold.

ADVANTAGES OF BETTER FOREX RESERVES

Ahead of a festive sale and the New Year's eve, higher forex reserves are likely to enable the Reserve Bank of India with Open-Market Auctions, should there be any need to control the Rupee's volatility against the Dollar. As of the time of reporting this story, a Dollar was commanding an exchange rate of 88.11 Rupees. During a festive season, consumers are more likely to spend on imported gadgets, imported gold, and spend more resources (higher utilization of petrol or Coal for electricity to power homes).

Anything imported, is generally paid-for with a reserve currency - either a Dollar, a British Pound, or SDRs (SDR as a financial instrument were used during the pandemic by several countries to pay when they did not have Dollars). Commoners buying the latest iPhone 17 Pro, for instance, may be paying for the commodity in Rupees, however many of these transactions are likely to be settled with the end-producer using a reserve currency - could be Dollars, Chinese Renminbi or any of the reserve currencies.

WHAT HAPPENED WITH GOLD LAST WEEK?

While Gold prices have been rallying since the pandemic, the last week saw some marginal volatility. Of the last six trading sessions, the first three saw US spot market prices rally. Of the later three sessions after the US Federal Reserve announcement, the first two saw Gold rates drop followed by a gain. Today, gold futures were quoting $3,600 per contract. London Market association rates for gold were quoting $3,643.70 per troy ounce. Readers should note that LBMA rates are not live rates and have a latency of one day.

On a weekly basis, gold futures prices were up by 0.82 percent.