Gold glitters in RBI’s vaults, but is it a reliable shield?

Gold now makes up nearly 20% of India’s forex reserves, exposing the RBI to price swings and liquidity risks

On October 24, the Reserve Bank of India (RBI) held aggregate foreign exchange (FE) reserves of $695.36 billion, $10.6 billion higher than a year before.

Foreign currency (FC) reserves, which do not include gold, were down by $27.2 billion to $566.5 billion, whereas the gold reserves were higher by $37.01 billion to $105.54 billion.

India’s FC reserves are depleting, whereas gold reserves have gone up sharply. Is this sound or reflective of a major vulnerability? Can gold reserves be used in crunch situations?

RBI piling up gold

Historically, the RBI did not covet gold. It also went through a traumatic experience pledging and selling gold in 1991.

In June 2018, the RBI’s FE reserves included $382.5 billion of FCs and $21.33 billion of gold; gold was only 5.58% of the FC reserves.

India had faced volatility in its FC reserves many times. In 2017-2018, the FC reserves went up by about $55 billion, declined by $12 billion the next year, and went up again in 2019-2020 by $64 billion.

The Department of Economic Affairs (DEA) was formulating gold as an investment asset policy, which proposed the RBI buying gold during times of major FE inflows to build gold reserves and to keep the foreign exchange rate stable.

In a meeting of the RBI’s gold policy committee in 2018, it was decided that the RBI may commence purchasing gold in small quantities, especially during times of gushing FE inflows.

The RBI began buying gold in a steady manner initially, and aggressively later. In 2022, it bought 65 tonnes, and in 2025, it had already exceeded 57 tonnes by September. Gold reserves rose from about 612 tonnes in 2019 to 880 tonnes in September 2025 (~33% in six years).

International gold prices started shooting up from 2023-2024, and rose from an average of $2,080 in 2023 to $2,600 per ounce in 2024. In October, gold prices peaked at about $4,500 per ounce, before declining to $4,000 per ounce currently.

India’s gold reserves reflect the effect of both quantity as well as price increase.

From $23.1 billion at the end of 2018-2019, gold reserves rose to $108.5 billion on October 17, 2025. The monetary value of gold reserves increased by 370%, whereas the physical quantity increased by about 33%.

Gold is a volatile asset

The global stock of gold is estimated at 225,000 tonnes, and annual production is about 3,500 tonnes. The central banks, including the RBI, hold about 16-17% of global gold.

Gold is mostly held by households that don’t usually sell it. Instead, they tend to buy more incrementally. As a result of limited supply, if its demand goes up, gold prices tend to shoot up.

In the last two years, like the RBI, many other central banks, especially the Chinese, have bought a considerable amount of gold. Lately, mutual funds and households have also jumped on the gold bandwagon for investment. Gold prices had to shoot up, rising by over 60% in 2025.

This seems to have worried the central banks, and in the past fortnight or so, there has been some moderation in their purchases; this has led to a fall in gold prices by ~10%.

Gold is indeed a volatile asset.

RBI is vulnerable

In the week ending October 17, the RBI’s gold reserves reached $108.5 billion, 19% of its FC reserves of $570 billion, growing nearly four times in the last six years. In the week ending October 24, the RBI’s gold reserves came down to $105.5 billion, resulting in a loss of $3 billion in one week.

The dollar value of gold reserves will be yo-yoing with its international prices, imparting serious vulnerability to the adequacy of India’s FE reserves, as it now constitutes almost 20% of the FC reserves.

There is a bigger risk as well. The FE reserves are meant to impart stability and orderliness by taking care of volatility in the demand and supply of foreign exchange.

India is perennially in a merchandise trade deficit. Currently, there is an enormous decline in foreign investment flows, particularly foreign portfolio investment (FPI). Net foreign direct investment (FDI) flows are also stalling. If services exports and remittances inflow slow down following ‘Trumponomics’, India will have a serious situation on the foreign exchange front.

Gold as an FE reserve is highly unsuitable in such situations. It is impossible to make payments in physical gold. If the RBI was to sell gold in the open market, the supply-demand equation would worsen, and gold prices would fall sharply.

The RBI may not be able to use and sell its gold when needed. Gold reserves, in such situations, become a liability, and do not prove to be an asset.

Downsize gold reserves

It will certainly be a better idea if the RBI were to adopt a policy of keeping gold reserves at about 10-15% of FC reserves.

As it has larger gold reserves than this, and international gold prices are quite lucrative, it will be advisable for the RBI to sell excess gold reserves over the next few months gradually to bring it to a lower band of 10%.

In times of excessive foreign currency inflows, the RBI may rebuild gold reserves to the upper band.

Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream Dented’, ‘Commentary on Budget 2025-2026’, and ‘We Also Make Policy’.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)