In a significant move in the history of Foreign Exchange Reserves, RBI has transferred 100 tonnes of gold from the UK vault to its domestic vault in FY24. This is the same gold reserve mortgaged in the 1990-91 foreign exchange crisis when India submitted part of its gold reserves to the Bank of England to secure a $405 million loan.
The loan was repaid soon enough by November 1991, but RBI chose to store its gold with the UK central bank for manegerial purposes. Storing gold abroad can unlock multiple benefits such as trading, entering into swaps, earning returns and facilitate international transactions.
But the with the increase in geopolitical tensions and loss of stability within governments has posed a threat to these gold reserves stored abroad. Cautioned against freezing assets by the West, RBI choose to move ahead with the repatriation of gold reserves.
Globally, the central banks across different countries have noted a significant decline of confidence in dollar assets. A US Treasury department data shows that non-US central banks’ holdings of US Treasury bonds have dropped from 49.8% in March 2023 to 47.1% in March 2024.
In March 2024, RBI’s total gold reserves was recorded at 822.10 metric tonnes compared to 794.63 tonnes in the previous year. In FY24, it added 27.47 tonnes of gold to its reserves. This will help in diversifying foreign exchanges and fight back inflation causing instability and currency volatility.
Why does RBI store gold reserves ?
Gols reserves primarily act as a gurantee to the central banks to back the national currency and act a store of value. Gold stocks in the country ensure the financial stability in its economy. Even during the medieval period, gold was widely used to redeem promises to pay depositors and noteholders.
In consultation with the Government of India, the RBI can use the locally stored gold reserves to control gold prices in the domestic market. With high demand for investment products like gold exchange traded funds, the RBI can utilise this set of gold reserves to maintain a robust local bullion market.
In lieu of storing gold reserves in foreign vaults, RBI has ramped up its gold purchases significantly. On average, the central bank has been purchasing nearly 6 tonnes of gold monthly.
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Major International gold vaults
There are two primary international vaults trusted globally. – Bank of England, offering extensive security measures including comprehensive survelleince systems, reinforced doors and strict access protocols; and Bank for International Settlements located in Basel, Switzerland. It facilitates international monetary and financial cooperation. Their services are exclusive to central banks and international organisations, enriching the security and accessibility of gold reserves.
