India's Forex Reserves Dip by $5.7 Billion, But Gold Holdings Soar

India's foreign exchange reserves decreased by $5.7 billion, standing at $634.59 billion for the week ending January 3, according to data released by the Reserve Bank of India (RBI) on Friday. However, gold reserves, which are part of the foreign exchange holdings, rose by $824 million to reach $67.1 billion.

The RBI purchased 8 tonnes of gold in November 2024, continuing its strategy of accumulating gold as a safe-haven asset amid global uncertainties. Central banks worldwide collectively bought 53 tonnes of gold that month, with India maintaining its position as the second-largest buyer, behind Poland. As of November, the RBI's total gold holdings had increased to 876 tonnes, with 73 tonnes purchased in 2024.

Pranav Mer, Vice President at JM Financial Services, noted that despite a stronger U.S. dollar, both gold and silver saw price increases due to safe-haven buying ahead of political changes, particularly Donald Trump's presidential inauguration.

The RBI uses foreign exchange reserves to manage the volatility of the Indian rupee, often intervening when foreign investors sell shares and capital flows out of the stock market. In light of the potential impact of the Trump presidency, Deputy Governor Rabi Sankar assured that the RBI is well-equipped to manage excessive exchange rate volatility.

The RBI’s robust forex reserves also enable it to take actions, such as releasing dollars in the market, to prevent the rupee from weakening too much and maintain currency stability.

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