As we step into a new year, gold — the historically sought-after safe haven — is reasserting its role as the ultimate portfolio diversifier and long-term strategic asset amid global economic and geopolitical ambiguity.

Central banks worldwide are pursuing forex reserve diversification and acquiring gold at a record pace to insulate their economies from the fragmenting global trade, financial market volatilities and geopolitical upheavals. In 2022, the share of central banks in the global gold demand doubled to 22.8 per cent from 11.1 per cent in 2021, as per data from the World Gold Council (WGC). By the end of 2024, this share stood at 23.6 per cent, reflecting a growing shift in the reserve management strategies adopted by these financial institutions worldwide, particularly in emerging markets, including India.

Evolving strategy

In 2024, the Reserve Bank of India (RBI) bought more gold, emerging as the third largest buyer globally after adding 72.6 tonnes to its growing supply, behind only the central banks of Poland (89.5 tonnes) and Turkey (77.4 tonnes). With the purchase of 4 tonnes more, as of December 2025, the RBI’s gold reserves currently total 880.2 tonnes — among the highest in the developing world.

At the start of the decade, in 2015-16, foreign currency assets (FCA) constituted 93.3 per cent of India’s forex reserves, while gold made up just 5.6 per cent. By mid-December 2025, the scenario stood drastically changed — of India’s $693.3 billion forex reserves, the share of FCA has reduced to 80.7 per cent and gold makes up 15.9 per cent.

In the aftermath of the Russia-Ukraine crisis in February 2022, gold demand from central banks shot up with renewed vigour. With Western sanctions freezing Russia’s dollar assets, gold was viewed as a key portfolio diversifier for risk mitigation, cushioning the impact of the sanctions on crude oil trade — the cornerstone of global energy markets.

Risks stemming from the uncertainties in US trade policy only reaffirm the RBI’s commitment to reducing dollar dependency. The imposition of new blanket and reciprocal tariffs by the US in April 2025, followed by a wave of similar reforms, placed on India’s exports to the US an estimated tariff burden of 50 per cent by August. Such policy capriciousness by India’s largest trade partner — as reflected by the spike in the US trade policy uncertainty index — indicates a fragmenting trade landscape where barriers persist until a bilateral trade agreement (BTA) is signed between the countries.

This inclination away from dollar-denominated assets is also supported by changing sentiments over the US economy, marked by sticky inflation with potential tariff-induced upward pressure, rising government debt burden, and other structural weaknesses, along with the Fed’s ongoing rate cut cycle softening the US dollar. Notably, while increasing its gold reserves, the RBI has also concurrently reduced its US treasury holdings to $202.7 billion by September 2025, from $247.2 billion during the corresponding period in the previous year, as per the US Department of the Treasury.

Way ahead for India

In 2025, as central banks worldwide turned towards gold with growing urgency as liquidity sank, the price of the metal hit the roof, reaching an average of $4,083 per ounce in November, as reported by WGC.

For India, the increased gold reserves are expected to hedge against currency volatility and the consequent revaluation of forex reserves. With the rupee depreciating fast to reach the ₹90 per dollar mark for the first time in December 2025, increasing the share of gold in forex reserves will help cushion against the impact of currency-linked valuation loss. On the other hand, surging gold prices will result in valuation gains.

Unstable gold prices, nonetheless, can act as a double-edged sword — it can disrupt forex stability if gold reserves keep building. These factors redirect focus on diversifying forex reserves across currencies to safeguard India against the ‘weaponisation’ of one currency. This strategy also aligns well with the RBI’s broader agenda of internationalisation of the rupee and the promotion of the Local Currency Settlement System (LCSS) arrangement with partner countries, particularly trade agreement partners.

After the Fed announced a 25-basis point cut in key benchmark interest rates — its third consecutive reduction — at its December meeting, gold prices are anticipated to gain, given its historically inverse relationship with the dollar. However, with geopolitical tensions, market fluctuations and trade policy uncertainties persisting, the gold-buying spree by the RBI and other central banks will have to be watched.

Although the dollar remains far from being replaceable as the world’s primary reserve currency, the RBI’s focus on building its gold reserves and diversifying forex currency composition is expected to minimise the risks associated with over-dependence on the dollar, thereby ensuring that economic stability is maintained during any external shock.

(The writers are economists with India Exim Bank. Views expressed are personal)

More Like This

Published on January 5, 2026