According to RBI’s latest foreign exchange reserves report, the central bank held 855 tonnes of gold as of the end of September, with over half, or 510.5 tonnes, now stored domestically. This development reflects a broader, ongoing effort by RBI and the Indian government to protect the nation’s gold reserves from potential risks abroad. Since September 2022, RBI has quietly brought back 214 tonnes of gold, driven by the need to safeguard holdings amid growing geopolitical uncertainties. Many officials within the government believe that housing gold in India is a safer approach during these uncertain times.
In a carefully planned secret mission involving special flights and heightened security to move gold, RBI and government officials worked to ensure that information about the gold transfers did not leak out. The shipments required exemption from certain tax levies to facilitate the smooth movement of gold. Though the government is open to future shipments, officials indicate that no additional large-scale repatriations are planned for this year, ToI reported.
Why central banks like RBI buy gold
Central banks globally, including RBI, view gold as a fundamental asset to diversify and strengthen their reserves. Gold provides protection against currency fluctuations and economic shocks, helping to preserve value through turbulent financial periods or inflation. Unlike paper currencies, gold holds universal appeal and is often seen as a “safe haven” investment, particularly during periods of financial instability or market volatility. By holding gold, a central bank like RBI not only gains a valuable hedge against uncertainty but also bolsters its economic credibility and the confidence of investors.Furthermore, RBI’s gold reserves have strategic importance domestically. Working closely with the government, RBI can use this gold to manage local gold prices, especially as consumer demand for gold-backed investments like exchange-traded funds grows in India. By maintaining a robust supply of gold within the country, RBI contributes to a stronger and more resilient bullion market that benefits both the national economy and individual investors.
The logistics of RBI moving gold from London
Reports earlier this year noted that around 100 tonnes of gold had already been transported from the UK, with another similar-sized shipment anticipated. These shipments marked the first large-scale repatriation since the 1990s, when India, under financial duress, sent part of its gold reserves abroad. Back in the early 1990s, India was forced to pledge its gold to secure a $405 million loan from the Bank of England to navigate a balance of payments crisis. Although this loan was quickly repaid, much of the pledged gold remained in the UK afterward due to logistical convenience.Today, India still has 324 tonnes of its gold stored in the vaults of the Bank of England and the Bank for International Settlements (BIS), both based in the UK. This bulk storage serves as a strategic reserve for RBI, with over 20 tonnes further set aside as gold deposits.
As one of the world’s largest gold custodians after the New York Federal Reserve, the Bank of England plays a crucial role in safeguarding gold reserves for several central banks, including India’s. This relationship with the Bank of England dates back to the vault’s inception in 1697, later expanded to handle the influx of gold from mining rushes in Brazil, Australia, California, and South Africa. The Bank of England’s vaults now house nearly 400,000 bars of gold and, as of early September, held close to 5,350 tonnes, or roughly 17 million troy ounces, of the precious metal.
One significant advantage of keeping gold in the Bank of England is access to the London bullion market, which offers unmatched liquidity. By keeping gold in London, RBI can tap into this market with ease for trading, swaps, and other transactions. This ease of access and immediate liquidity has historically made the UK a prime location for storing reserves.
RBI’s move to increase its domestic gold reserves from 8.1% in March to 9.3% of its foreign exchange holdings by the end of September indicates a broader shift in its risk management approach. While the UK’s storage services have long been seen as secure, recent global developments have prompted a reevaluation. The freezing of Russian assets by Western nations in the wake of geopolitical conflicts has raised concerns globally about the vulnerability of assets held overseas. Many observers view RBI’s repatriation of gold as a response to these heightened risks, ensuring a substantial portion of India’s reserves remains within its borders.
Why RBI keeps some Gold abroad
Despite the benefits of domestic storage, there are practical reasons for RBI to keep part of its gold in foreign vaults. Gold stored overseas can be easily traded, swapped, or used as collateral, which provides flexibility for central banks like RBI. Additionally, as RBI often buys gold from international markets, overseas storage facilitates these purchases. In an interconnected financial world, this ability to maneuver quickly in global markets is advantageous.
Yet, international storage is not without risks. Recent freezes of foreign-held assets highlight how geopolitical conflicts can impact the security of a nation’s overseas holdings. RBI’s choice to bring a portion of its reserves back to India likely reflects a more balanced strategy to protect against these risks while maintaining flexibility for international transactions.
