Why in news?

The Reserve Bank of India (RBI) has brought back nearly 130 metric tonnes of gold owned by it and kept in safe custody of the Bank of England in the last two-and-a-half years.

This decision marks a shift in the RBI's approach to safeguarding its gold reserves, with a 60% increase in domestic gold holdings during this period.

What’s in today’s article?

• Rise in the RBI's domestic gold holding
• Gold Kept in Bank of England
• RBI’s strategy to bring back its gold assets to India

Rise in the RBI's domestic gold holding

• As of September 2024, the RBI's domestic gold holding has increased to 510.46 metric tonnes, up from 295.82 metric tonnes in March 2022.
• Presently, around 324 metric tonnes of the RBI's gold remains under the custodianship of the Bank of England, a reduction from 453.52 metric tonnes in March 2022.
• In value terms (USD), the proportion of gold in India's total foreign exchange reserves rose from 8.15% at the end of March 2024 to approximately 9.32% at the end of September 2024.

Gold Kept in Bank of England

• One of the world's largest gold vaults
  • The Bank of England hosts one of the world's largest gold vaults, second only to the New York Federal Reserve.
  • It stores around 400,000 bars of gold, holding gold for many central banks worldwide. This facility incurs a cost for gold safekeeping.
• India’s gold in Bank of England
  • The RBI continues to retain 324 tonnes of its gold reserves under the protection of the Bank of England and the Bank for International Settlements, which collectively hold a substantial portion of India's gold abroad.
    • Around 20 tonnes are additionally managed through gold deposit schemes.
  • Storing part of India’s gold in London provides the RBI with immediate access to the London bullion market, allowing for enhanced liquidity. 
  • Historically, in 1991, India sent 47 tonnes of gold to the Bank of England during a balance of payments crisis to secure funds for repaying international creditors.

RBI’s strategy to bring back its gold assets to India

• Central Banks Buying Gold
  • Since the U.S. imposed sanctions on Russia in 2022 following the Ukraine invasion, central banks globally have been increasing their gold reserves as a hedge against inflation and to decrease reliance on the U.S. dollar.
    • Since Russia’s invasion of Ukraine, India has purchased gold at a faster pace than any other G20 country, surpassing both Russia and China.
  • This trend, termed "de-dollarisation," aims to diversify away from the dollar amidst a surge in gold prices. That’s why central banks are buying gold.
• Significance of this strategy
  • Sign of a strong economy
    • In 1991, at the time of a severely difficult economic phase, RBI had to pledge some gold to raise funds.
    • At that time, it was also remembered as a sign of a weak economy.
    • Now, bringing back gold reflects the recovery and a major change in the strength of Indian economy.
  • Optimizing financial resources
    • Since RBI has gold deposits mostly held internationally, the decision to bring back some of it will save the cost of storage, which is being paid to foreign banks.
  • Strategic significance
    • This is part of a broader strategy to make better use of the national asset in terms of worldwide instability.
    • Globally, central banks are increasingly investing in gold as a safe-haven asset, partly as a strategy to reduce reliance on the U.S. dollar.
    • India’s decision to repatriate and store gold domestically aligns with this global trend and demonstrates a strong belief in the resilience of its economy.
  • Rise in safe-keeping capacity
    • The RBI has been steadily repatriating gold from the Bank of England, citing improved domestic capacity for physical storage.
    • As per the RBI Governor, the increasing amount of gold held by the RBI within India as part of its reserve management strategy, emphasizing the importance of maintaining domestic storage capacity.
    • As of October 25, 2024, India's total foreign exchange reserves have risen to $684.8 billion, sufficient to cover over 11.2 months of imports (as of June 2024).
  • Diversification
    • Increasing gold reserves allows India to diversify its foreign exchange holdings, reducing reliance on any single currency and mitigating risks from currency fluctuations and economic instability.
    • Gold, as a stable global asset, provides a safe haven, balancing the reserves portfolio and shielding the economy from shocks affecting specific currencies.
    • This diversification strengthens financial security and gives the government greater flexibility in economic management, bolstering the overall stability and resilience of the economy.
  • Hedge Against Inflation
    • Gold acts as a hedge against inflation, retaining or appreciating in value when currencies lose purchasing power.
    • By increasing gold reserves, a country protects its economy from inflation's negative effects, ensuring stability for long-term financial planning and investor confidence.
    • Substantial gold reserves safeguard against currency devaluation, preserving national wealth amid economic uncertainties.
• Conclusion
  • The RBI's recent transfer of gold from the UK marks a key step in strengthening India's economy.
  • This move preserves national assets, prepares for future economic challenges, and aligns with global central banks’ recognition of gold’s role in ensuring long-term stability.