Reserve Bank of India's gold reserves

Reference

The Reserve Bank of India (RBI) has moved 100 metric tonnes of its gold stored in the UK to domestic vaults in India. Gold reserves are gold held by a country's central bank, which serves as a backup and store of value for financial commitments.

India's gold reserves

• Like other countries, India keeps a part of its gold reserves in overseas vaults to diversify risk and facilitate international trade.
• India's total gold reserves as of FY24 amounted to 10 metric tons. The total amount of gold stored locally in India is 408 metric tons. Of this, over 308 metric tons of gold is backed by notes issued in India while 100.28 metric tons of gold is held as assets of the Department of Banking.
• At present, a total of 79 metric tonnes of Indian gold is kept safe abroad.

Why is gold stored by RBI?

• Avoidance of uncertainty: RBI stores gold as a protective measure against negative interest rates and geopolitical instabilities
• Diversification of Foreign Exchange Reserves: Foreign exchange reserves are expanded through gold which increases stability, liquidity and value during crisis.
• Accumulated value of gold: The historical importance of gold in the economy lies in its function as a reserve currency, intrinsic value and its ability to strengthen a country's currency.
• Additionally, it can act as an alternative to government securities in central bank activities.
• As per Section 33 of the RBI Act, 1934, all bank notes issued by the RBI are backed by gold, government securities and foreign currency assets.

Storage of Gold by RBI abroad

• India's gold reserves are kept abroad mainly in the Bank of England as it is famous for its strict security measures.
• Apart from this, RBI also keeps a part of its gold reserves at the Bank for International Settlements (BIS) in Basel, Switzerland and the Federal Reserve Bank of New York in the United States. 

Why is gold stored abroad by RBI?

• Logistics Facility : During the foreign exchange crisis of 1990–91, India pledged a part of its gold reserves to the Bank of England to obtain a loan of $405 million.
• Although the loan was repaid by November 1991, the RBI chose to keep the gold in the UK for logistical reasons.
• Facilitates economic activities: Gold stored abroad can be easily used to trade, enter into swaps and earn returns.
• RBI also buys gold from the international markets and facilitates these transactions by storing it abroad. 

What are the implications of RBI transferring gold to India at present?

• Increase in confidence: This gold transfer in India currently gives a strong message to the global markets about India's strong economic position and policies.
• Furthermore, increased trust can attract more foreign investment, which contributes to economic growth and stability.
• Security of assets: RBI has conveyed the message of safely managing its assets by storing a large part of its gold reserves domestically.
• This move reassures international investors and financial markets that RBI or India is serious about its assets and maintaining financial stability and protection from potential risks.
• Indian Jurisdiction: Once gold is transferred to India, it is now subject to Indian laws and regulations.
• Hence, this move enhances the overall security of RBI's gold.
• Less dependence on foreign patrons: This move also reflects India's intention to reduce dependence on foreign patrons.
• This will reduce exposure to geopolitical risks and financial instabilities.