Gold Reserves of RBI

Recently, India has moved 100 metric tonnes of its gold stored in the U.K. to domestic vaults in FY24.

About Gold Reserve

A gold reserve is the gold held by a country’s central bank, acting as a backup for financial promises and a store of value.

• Gold Reserves of India: India, similar to other countries, keeps part of its gold reserves in foreign vaults to diversify risk and ease international trade. 
  • As of FY24, India’s total gold holdings amount to 822 metric tonnes.
• Storage of Gold Reserves: India’s gold reserves are mainly kept at the Bank of England, renowned for its strict security measures. 
  • The RBI also holds 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.
• Top Gold Reserve Holding Countries: United States leads with 8,133.46 tonnes, followed by Germany with 3,352.65 tonnes and India with 822.09 tonnes.

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Reasons Behind RBI’s Gold Storage Abroad

• Logistical Convenience: Amid the foreign exchange crisis of 1990-91, India transferred its gold reserves to the Bank of England as collateral for a loan of about 405 million. 
  • Although the loan was repaid in November 1991, the RBI chose to maintain the gold in the UK for logistical convenience.
• Trading in Stock market: Gold reserves stored abroad remain accessible for trading on the stock market, enabling potential returns.
  • Furthermore, the RBI acquires additional gold from the international market and stores it overseas.

Reasons Behind Hoarding of Gold by RBI

• Hedge Against Uncertainty: The Reserve Bank of India (RBI) is amassing gold as a defensive measure against negative interest rates and geopolitical instabilities. 
  • During periods of inflation and economic turmoil, gold presents a favorable return compared to US government bonds. 
  • Furthermore, gold serves as a safeguard against geopolitical uncertainties, particularly amidst conflicts such as the Russia-Ukraine war and tensions between the US and China.
•  Diversification for Forex Reserves: Expanding forex reserves through gold enhances stability, liquidity, and worth during crises.
• Economic Significance: Gold’s historical importance in the economy lies in its function as a reserve currency, inherent worth, and its potential to strengthen a nation’s currency.
  • Additionally, it can act as an alternative to government securities in central bank activities.
  • According to Section 33 of the RBI Act, 1934, all banknotes issued by the RBI are supported by assets including gold, Government Securities, and Foreign Currency Assets.

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Reasons for the Transfer of Gold by RBI

• Diversifying Storage: The RBI decided to move the gold to India for logistical reasons and to ensure diversified storage. 
  • The transfer helps in saving on storage fees paid to foreign custodians, such as the Bank of England, and indicates confidence in the Indian economy’s stability.
• Geopolitical Factors: Geopolitical factors play a significant role, particularly concerning tensions abroad (Russia-Ukraine war, Gaza War) which may pose a risk of freezing the RBI’s reserve gold.
  • Given the escalating uncertainty in the global geopolitical landscape, maintaining physical control over gold reserves domestically is deemed a more secure choice. RBI aims to safeguard its substantial gold reserves.
• Boosting Economic Confidence: Enhancing domestic gold reserves can bolster confidence in India’s robust financial position and stable economy. 
  • The RBI is contemplating measures to promote economic stability and potentially repatriate its gold holdings to India.

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