Decoded: Why does the RBI keep gold abroad and why has it got some back?

With the transfer of around 100 metric tonnes of gold from the UK last week, India's gold reserves are now evenly distributed, with 400 tonnes each in India and abroad

The Reserve Bank of India (RBI) last week transferred 100 metric tonnes of its gold from the United Kingdom to domestic vaults. This notable transfer is one of India’s largest gold movements since 1991, when part of the gold reserves was pledged to address a foreign exchange crisis.

Speaking after presenting the RBI’s second monetary policy for FY25 on Friday, RBI Governor Shaktikanta Das said that the central bank moved gold reserve from the UK to India 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 tonnes of gold stored abroad and 300 tonnes in India. With the repatriation of 100 tonnes, the gold reserves are now evenly distributed, with 400 tonnes each in India and abroad.

 

There was significant speculation among market participants that recent geopolitical events, particularly the US’s derecognition of Russia’s foreign exchange reserves, may have influenced the decision to bring the gold back to India. This raised concerns that countries might prefer to hold their gold domestically to avoid similar risks.

How much gold does the RBI hold?

As of March 2024, the RBI’s total gold reserves are 822.10 metric tonnes, with a substantial portion stored abroad. The recent transfer has increased the locally stored quantity to over 408 metric tonnes, resulting in an almost even split between local and foreign holdings.

According to the central bank’s annual report for FY24, over 308 metric tonnes of gold in India, and another 100.28 tonnes are held locally as an asset of the banking department. Of the total gold reserves, 413.79 metric tonnes are held abroad.

The RBI has significantly increased its gold purchases recently, acquiring one and a half times the amount of gold in the first four months of 2024 compared to the entire previous year. 

Economists suggest that this aggressive buying is partly due to declining confidence in dollar assets among central banks globally. Data from the US Treasury Department indicates that non-US central banks’ holdings of US Treasury bonds decreased from 49.8 per cent in March 2023 to 47.1 per cent in March 2024.

In FY24, the RBI added 27.47 tonnes of gold to its reserves, raising the total from 794.63 tonnes the previous year. This move aligns with a broader strategy to diversify foreign exchange reserves and hedge against inflation and currency volatility.

Why does the RBI keep gold reserves in foreign vaults?

During the 1990-91 foreign exchange crisis, India pledged part of its gold reserves to the Bank of England to secure a $405 million loan. Although the loan was repaid by November 1991, the RBI chose to keep the gold in the UK for logistical 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 swaps, and earning small returns. The RBI also accumulates gold from international markets, and keeping it in Bank of England vaults is logistically convenient.

What are the risks of storing gold abroad?

Geopolitical tensions can create uncertainty about the safety of international assets. The recent freezing of Russian assets by Western nations and concerns about the UK economy has likely increased the Indian government’s worries about the safety of gold reserves overseas.

What can the RBI do with the gold?

In consultation with the government, the RBI can use the gold in the domestic market to manage gold prices, especially given the high domestic demand for investment products like gold exchange-traded funds. This approach ensures the gold remains within the country and supports the development of a local bullion market without promoting wasteful consumption.

Why does the central bank buy gold?

The RBI buys gold as a hedge against inflation and currency volatility and to diversify its foreign exchange reserves. A major reason for holding gold reserves is the declining confidence in dollar assets among central banks globally.