Context: The Reserve Bank of India (RBI) has commenced the transportation of 100 tonne of its gold reserves from the United Kingdom back to India. This marks the first occasion since 1991 that the RBI has repatriated a portion of its overseas gold reserves to domestic vaults.

• At present, India has huge Foreign Exchange Reserves to cover up to 11 months of Imports. As of March 31, 2024, the total gold held by the Reserve Bank was 822.10 metric tonnes as compared to 794.63 metric tonnes as of corresponding period.

Key highlights

• The Reserve bank of India brings back 100 tonnes of Gold from the Vault of UK to India. This is a major shift in the Economic Policy of the RBI, as it will now hold most of its Gold in its own vault.

• These changes have significant implications for India’s economic sovereignty and global market dynamics. Most countries keep their gold in the vaults of the Bank of England or other such location and pay a fee for the privileges.

• Of the total 822.1 tonnes of gold that central bank had in March 2024 end, 413.8 tonnes was overseas.

• More than half of the RBI's gold reserves are kept overseas in safe custody with the Bank of England and the Bank of International Settlements, while about a third is stored domestically.

• Repatriating the gold will help the RBI save on storage costs paid to the Bank of England.

• Gold in India is typically held in vaults in RBI’s old office building on Mumbai’s Mint Road as well as Nagpur.

India's Gold Reserves

• As of March 2024, RBI's total gold reserves amount to 822.10 metric tonnes. Historically, a significant portion of this reserve was stored abroad, including with the Bank of England.

• However, the recent transfer of 100 metric tonnes to India brings the local holding to over 408 metric tonnes, almost equalizing the distribution between domestic and foreign storage.

• Breakdown of Gold Holdings: According to RBI's annual report for FY24, over 308 metric tonnes of gold serves as backing for issued currency notes, while an additional 100.28 tonnes is held domestically as an asset of the banking department.

• India's Global Ranking: India ranks 9th globally in terms of gold reserves. This substantial holding reflects India's cultural affinity for gold and its historical significance as a store of value, contributing to the country's economic stability.

Purpose of Gold Reserves

• Store of Value: Gold is perceived as stable and reliable, instilling confidence in economic stability during uncertainty.

• Currency Stability: While the gold standard is no longer prevalent, gold reserves can still support a country's currency stability.

• Diversification: Gold diversifies a country's asset portfolio, mitigating risks associated with market fluctuations.

• Inverse Correlation with USD: Gold's value often increases when the US dollar declines, providing a safeguard during market volatility.

• International Trade and Finance: Some countries use gold for trade settlement or as collateral, enhancing creditworthiness and global standing.

• Hedge during Crises: Gold serves as a hedge against economic downturns or geopolitical uncertainties, protecting against inflation and currency devaluation.

What is a Gold Reserve? 

• A gold reserve is the gold held by a national central bank, intended mainly as a guarantee to redeem promises to pay depositors, note holders (e.g. paper money), or trading peers, during the eras of the gold standard, and also as a store of value, or to support the value of the national currency.

• India, like many other countries, stores a significant portion of its gold reserves in foreign vaults.

• The top 10 countries with the most gold reserves include the United States, Germany, Italy, France, Russia, China, Switzerland, Japan, India and Netherlands (estimates by World Gold Council).

Why RBI chose Bank of England?

• Bank of England has traditionally been the storehouse for most number of central banks. For India it is no different as some stocks of the country’s yellow metal is lying in London from pre-Independence days.

How RBI shifted its gold from UK to its vault?

• Getting gold back to RBI’s vault was an extensive logistical exercise.

• It began with months of planning, followed by precise execution and close coordination between the finance ministry, RBI and several other departments of government as well as local authorities.

• The RBI had to get a customs duty exemption to ship the precious metal into India with the Centre “foregoing revenue” on what is a sovereign asset.

• However, there was no exemption from integrated GST (goods and services tax), which is levied on imports, as the tax is shared with the states.

• Also, a special aircraft was used to bring back the bulk quantity of gold with adequate security arrangements put in place.

Why shifting gold from UK helps RBI?

• Shifting gold to its own vault will help RBI save storage costs that it pays to the Bank of England.

• RBI started purchasing gold a few years ago and decided to undertake a review of where it wants to store it, something that is done from time to time.

• Since stock was building up overseas, it was decided to get some of the gold to India.