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Where does RBI store all of its gold & why?

ICICIdirect 12 Mins 20 Jun 2024

Do you know that the Reserve Bank of India (RBI) has tons of gold? The captivating part is that most of the gold that RBI owns is not present in India. So, where is the gold? But why is the central bank not keeping the gold in India? If you are curious to find the answers to these questions, you are reading the right article. We explain everything related to the RBI's gold reserves.

What are gold reserves?

But before we get into the details of gold reserves, it is essential to understand them. Gold reserves refer to the physical gold bullion or coins held by a national central bank. These reserves are distinct from gold jewelry or privately held gold.

In the past, gold played a central role in the international monetary system. Currencies were directly linked to the price of gold, meaning a specific amount of gold guaranteed the value of a nation's currency. It was known as the gold standard. However, this system ended in 1973. Though the gold standard is no more, gold reserves remain an essential asset for central banks. Why? We look at the reasons in the next section.

Why does the RBI keep gold reserves?

Here are some reasons for keeping gold reserves: We have already given a situation to make more sense of each point:

Stability and Trust: You may already know that gold has been considered a store of value for centuries. It is recognized globally and trusted for its intrinsic value. Holding gold reserves provides financial security for a nation.

During economic crises or hyperinflation, gold retains its value better than most other assets. For instance, during the 2008 global financial crisis, gold prices surged as investors flocked to safe-haven assets.

Risk Management: Central banks diversify their reserves to mitigate risks. Holding a mix of currencies, bonds, and gold reduces the risk associated with any single asset class. The main point is that gold is not tied to any single currency or country's economic performance, making it an effective hedge against currency risk.

If the value of the US dollar declines, countries holding large dollar reserves might see a reduction in the value of their reserves. Gold helps balance this risk as its value is independent of currency fluctuations.

Protection Against Inflation: Gold is an effective hedge against inflation. As the value of fiat money decreases with inflation, gold typically retains its value, preserving purchasing power. Historically, gold has maintained its value over the long term, protecting against the eroding effects of inflation.

Did you know that in the 1970s, when inflation rates were high globally, gold prices increased significantly, providing a buffer against the currencies' devaluation?

Settlement of International Trade: Gold is universally accepted and can be used to settle international trade balances. It is a liquid asset that can be converted into cash or other currencies in no time. During financial emergencies, gold reserves can be liquidated to provide immediate liquidity.

Let us say a country is experiencing a balance of payments crisis. It can use its gold reserves to settle international debts or import essential goods, thus stabilizing the economy.

Central Bank Credibility: Maintaining gold reserves boosts confidence in the central bank's financial strength and credibility. It reassures investors and international partners of the country's economic stability.

During periods of economic turmoil, such as the 1991 economic crisis in India, the RBI pledged part of its gold reserves to secure loans from the International Monetary Fund (IMF), demonstrating its financial stability and credibility.

Managing Liquidity and Stability: Gold reserves can be used by central banks as a monetary policy tool to manage liquidity and stabilize the economy. 

Where does the RBI store its gold?

The RBI stores its gold reserves in a split fashion. It means that a portion is kept domestically and another abroad. Here is the breakdown:

Split 1: Domestic Storage

As of March 31, 2024, over 408.31 metric tonnes of gold were stored domestically. These reserves are kept in high-security vaults at the RBI's facilities in Mumbai and Nagpur.

Split 2: Foreign Storage

Around 413.79 metric tonnes were stored abroad at the same time. The primary locations for this foreign storage are:

  • Bank of England in the United Kingdom
  • Bank for International Settlements (BIS) in Switzerland 

Why are foreign banks chosen for storing gold?

Storing gold with foreign banks is a common practice in many countries, including India. Let us look at some of the reasons why central banks keep gold in foreign banks:

High Security: Foreign banks, particularly those in major financial centers like London, New York, and Zurich, have state-of-the-art security measures. These institutions have extensive experience and infrastructure designed to safeguard large quantities of gold.

Market Proximity: Storing gold in major financial centers ensures quick access to global gold markets. These locations facilitate the rapid buying, selling, or swapping of gold, enhancing liquidity.

Diversification: Diversifying storage locations internationally helps mitigate geopolitical risks. In the event of political instability or conflict in one country, gold reserves stored abroad remain secure.

Professional Handling: Foreign banks specializing in gold storage offer professional handling and management services. The services include regular audits, efficient transportation, and secure storage practices.

Central Bank Cooperation: Foreign banks in major financial centers often have strong relationships with global central banks, facilitating cooperation and coordination in times of financial need.

Recent gold reserve shift from the UK to India

In FY24, the RBI repatriated 100 tonnes of gold from its reserves held in the Bank of England to domestic vaults in India. It is a noteworthy event for a couple of reasons:

  • First in Decades: It marks the first significant repatriation of gold by the RBI since the early 1990s.
  • Potential Shift: It suggests a possible move by the RBI towards storing a larger portion of its gold reserves domestically.

Why did the RBI decide against shifting 100 tonnes of gold reserves to domestic vaults?

The RBI has not given specific reasons for this move. However, experts have a say on this. Below are some reasons for this decision by the RBI:

  • Geopolitical Considerations: Geopolitical tension is a main consideration, as per experts. If there is tension in the country abroad, there is a risk of freezing the RBI's reserve gold. However, an increasingly uncertain global geopolitical environment is seen, so having physical control over gold reserves within the country is considered a safer option. The RBI wants to save its large amount of gold reserves.
  • Security and Control: Bringing gold back home will give the RBI more direct control and potentially reduce reliance on foreign vaults.
  • Cost Savings: Storing gold abroad can incur storage and insurance fees. Bringing it to India could save on these costs.
  • Economic Signal: It could be a signal of confidence in the Indian economy and its financial stability.

Impact of the recent shift

The long-term impact of this transfer remains to be seen. While there are potential benefits in terms of security, cost savings, and symbolism, there are also logistical considerations and potential changes in insurance and market participation to address. Also, if the RBI continues to repatriate a significant amount of gold, it could affect their ability to participate readily in the international gold market, if needed.

Before you go

We hope all your questions are answered by now. Regarding the shift of gold reserves, it will be interesting to see if this is a one-time event or the beginning of a larger trend by the RBI to bring more of its gold reserves back to India.

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