Due to high inflation, even central banks increased their holdings of gold reserves. When inflation in a country is high the value of its currency depreciates in real terms. This happens because of declining purchasing power of the currency due to rising inflation. Gold acts as a hedge against inflation. Its value is largely unaffected by high inflation. The rising inflation in almost every major country in the past 2 years has depreciated the value of their currencies in real terms.
As part of their foreign currency assets, central banks such as Reserve Bank of India, also hold gold. Besides gold, they also hold foreign currencies, such as dollar. According to an analysis done by Moneycontrol, gold holdings of RBI increased to Rs 3.75 lakh crore in March 2023 from Rs 2.09 lakh crore in March 2020. This is an increase of 79.4% in the period. Now in this period, the price of gold rose by around 4.4%. So the increase in value of gold holdings of RBI is not just due to increase in the price of gold. It is significantly due to increase in the gold holdings of the central bank in volume terms.
According to World Gold Council, central banks bought 1,136 tonnes of gold in 2022. This is the highest level of gold bought by central banks, since 1967.
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