In September 2011, when gold prices had peaked to a record high of $1,921.15 ounce, RBI's gold holding was valued at $37.8 billion

The nose-diving gold prices globally should worry everyone who owns the yellow metal considering it as a safe investment asset, especially when reports doing rounds that the value of gold is unlikely to recover fast. A strong US dollar and likely increase in interest rates by the US Federal reserve later this year have prompted experts worldwide to believe that chances for a quick rebound in gold prices from the current multi-year lows are low.

The decline in the gold prices has wiped out the value of gold reserves with the Reserve Bank of India (RBI) by over 44 percent compared with the peak levels in 2011. The Indian central bank has 557.75 metric tones gold in its reserves.

At the recent five-year low of $1,072.35 per ounce on 20 July, the value of the RBI’s gold reserves plunged to about $21.1 billion, down by 44.18 percent, from $37.8 billion as of September 2011, when gold prices had peaked to a record high of $1,921.15 ounce. On Thursday, gold prices rose to $1,098.27 an ounce, up 0.33% from the previous close.

Gold is a key constituent of the RBI’s foreign exchange reserves. The others include foreign currency assets, special drawing rights and reserves held in International Monetary Fund. Currently, gold constitutes about 5.4 percent of the reserves in terms of value.

Technically, the slide in value shouldn’t be a major worry for the central bank if one takes a long-term view. Over the years, the RBI’s gold reserve value has appreciated multi-fold when the yellow metal had a long period of bull-run. In that sense, the drop in the gold value is notional. The central bank’s gold holding has remained constant for many years now.

Globally, central banks use gold as a safe instrument in their reserves that could guard them in the event of financial crises. Gold’s contribution to the total reserves of the RBI had dropped to less than 3 percent in 2008, from a peak of 20 percent in 1994.

After the share of gold to reserves plunged in 2008, the RBI bought 200 tonnes of gold from IMF in November 2009, which took the share of gold in reserves to 8 percent. The RBI values its gold reserves at the end of the month at 90 percent of the daily average price quoted on the London Stock Exchange.

Gold is the last resort for any central bank in the event of a crisis or depletion of its reserves. Even in India’s case, the central bank had pledged 67 tonnes of gold to Union Bank of Switzerland in 1991 during the balance of payments crisis, and also to the Bank of England, to raise $605 million to build its forex reserves, which had fallen to mere $1.2 billion in January 1991.

India’s foreign exchange position has improved significantly from those days, with total reserves currently standing at $354 billion.