Why is RBI bringing gold reserves back to the country
The Reserve Bank has been on a localisation spree in recent years when it comes to storing 854.7 tonne of its gold assets/reserves. Of the total, 510.5 tonne are now stored in the different vaults of the central bank, mostly in the Mumbai vaults.
It has also been on a gold-buying spree since between April 2022 and September 2024, it has added close to 100 tonne to the reserves.
In just two years ending September 2024, the RBI has quietly brought back 214 tonnes of gold. In FY23, the monetary authority had brought in only 5.3 tonne back to the country, taking the domestic storage to 301.1 tonnes. In FY24, the number went up by 106.8 tonne, taking the local storage to 408.3 tonne. In the first six months of the current financial year, the central bank brought back 102.2 tonnes, taking the total to 510.5 tonne.
Of the rest of the reserves, 314 tonne are with the safe vaults of Bank of England, 10 tonne are with the Bank for International Settlement in Basel, Switzerland and the Federal Reserve Bank of New York and the reminder 20.3 tonnes are in gold deposits, according to the latest data released by the central bank late October.
Putting the 1991 clock back
This is a story of setting the January and July 1991 clock back when the nation was forced to airlift more than close to 87 tonne to raise emergency forex to prevent a sovereign default and to make enough for exim cover as the foreign exchange reserves were only $600 million, which is now is close to $700 billion.
Of the total pledge, the government pledged 67 tonne as collateral to secure a $2.2 billion emergency loan from the International Monetary Fund, for this 47 tonne were airlifted to the Bank of England in May 1991 to secure a $405 million loan; and 20 tonne were sent to the Union Bank of Switzerland in May 1991. Before that in January 1991, the State Bank of India was asked to lease some of its gold to bolster forex reserves and after government approval, 20 tonne of gold worth $234 million was shipped abroad. Following improvement in the balance of payments position, the Reserve Bank had bought 18.36 tonne during November-December of 1991.
Though the loan was repaid by November 1991, the RBI chose to keep the gold in there for logistic reasons. Gold stored abroad can be easily used for trading, entering into swaps, and earning returns.
The RBI also buys gold from international markets, and storing it overseas facilitates these transactions. Additionally, gold held in the form of certificates can be used for trading, entering into currency swaps, and earning small returns. The Reserve Bank also accumulates gold from international markets, and keeping it in Bank of England vaults is logistically convenient.
So, what is driving the RBI to bring back gold to the country that too in special aircraft and in utter secrecy?
When asked about it during the post-monetary policy presser on June 7, 2024, governor Shaktikanta Das said the central bank moved gold reserves from England to the RBI vaults in Mumbai as “there is enough storage capacity and that there is nothing more should be read into it.” Before this transfer, the RBI had around 500 tonne of gold stored abroad.
Mint Road observers see many a reason
But many Mint Road watchers point to the need to safeguard holdings amid growing geopolitical uncertainties — after Russia invaded Ukraine in the last week of February 2022, Western nations froze the Russian assets parked in their countries.
The US went a step further by derecognsing Russia’s foreign exchange reserves. Since October last Israel has been fighting three wars simultaneously and many within the government believe that housing gold in our own vaults is a safer approach during these uncertain times apart from saving on insurance cost and storage fees, which runs into tens of millions. Another reason is to diversify risks as sorting the high value asset in different locations minimizes risks apart from diversifying forex reserves.
Some even point to the worries about the health of the British economy has also likely increased the RBI’s worries about the safety of gold reserves overseas.
An economist said this is a tool the RBI uses as part of hedging the inflation risks as gold can act as a hedge against inflation, retaining or increasing in value when currencies lose purchasing power. Another use is that gold reserves can safeguard against rupee devaluation, preserving national wealth amid economic uncertainties.
Source: https://www.newindianexpress.com/