RBI's Strategic Gold Reserves: Why India Brings 100 Tonnes of Gold Back Home

The Reserve Bank of India (RBI) has a significant gold reserve of 822.10 metric tonnes as of March 2024. Out of this, 308 metric tonnes are held as security for issuing notes, and 100.28 tonnes are stored locally as assets in the banking department. The remaining 413.79 metric tonnes are kept abroad. India's gold reserves are primarily stored in the Bank of England, known for its stringent security protocols. The RBI also stores a portion 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 Does RBI Keep Gold Abroad?

Market Convenience: Holding gold in liquid markets like the UK allows the RBI to use it for trade and swaps easily, and to earn returns on it. The international gold market offers a broader range of trading and investing opportunities compared to domestic markets.

Risk Mitigation: Diversifying the storage of gold across multiple locations reduces the risk of unforeseen events such as wars or political unrest in any one location. This strategy ensures that gold reserves are not concentrated in one place, making them more resilient to global risks.

Crisis Assistance: During the foreign exchange crisis of 1990-91, India pledged some of its gold reserves with the Bank of England to secure a PSM 405 million loan. The loan was repaid by November 1991, demonstrating the usefulness of international gold reserves in times of financial distress.

Why Does the RBI Transfer 100 Tonnes of Gold Back Home?

While storing gold overseas provides several benefits, it also comes with certain risks, especially during times of geopolitical tensions and war. Storing gold abroad incurs storage and security costs, which can be significant.

The recent freezing of Russian assets by Western nations has raised concerns about the safety of assets kept abroad. This has prompted the RBI to bring a portion of the gold reserve back home. By transferring 100 tonnes of gold to India, the RBI aims to reduce expenses related to overseas storage and enhance the security of the gold reserves.

How Does the RBI Plan to Utilize Its Gold Reserves?

The RBI's decision to increase its gold reserves further can serve multiple purposes:

Controlling Local Gold Prices: With a larger gold reserve, the RBI can intervene in the market to manage gold prices. By using some of its gold in India, the bank can influence local gold supply and demand dynamics. Hedging Against Financial Risks: A larger gold reserve acts as a hedge against any financial crisis. Gold is often seen as a safe haven asset, and holding more of it can provide the RBI with additional financial cushion. Controlling Inflation and Currency Devaluation: The RBI can use its gold reserves to mitigate the impact of currency devaluation and control inflation. By maintaining a larger gold reserve, the bank can ensure that it has the means to intervene in the foreign exchange market when necessary.

Near-term, the RBI has already taken steps to bolster its gold reserve. For instance, the RBI added about 27.47 tonnes of gold to its total reserve in a recent move. This strategic addition of gold aligns with the RBI's broader objectives of ensuring financial stability and resilience.