In a historic move, the Reserve Bank of India (RBI) has moved approximately 100 tonnes (1 lakh kilograms) of gold from the United Kingdom to its vaults in India. As per reports, this is the first time since 1991 that India has undertaken such a large-scale transfer of gold reserves. For the unversed, more than half of the RBI’s gold reserves are held overseas in secure custody with the Bank of England and the Bank of International Settlements, while approximately a third is stored domestically. Now, the question arises as to why RBI moved back its gold to India and also why it was kept in the Bank of England initially.
Why did RBI move back its gold reserves from the Bank of England?
As per reports, it is believed that RBI's latest move has been taken as a step towards cost-cutting. To be precise, RBI is saving its storage costs currently paid to the Bank of England As per the annual data released by the RCB, India's central bank held 822.10 tonnes of gold as part of its foreign exchange reserves as of March 31, 2024, an increase from the 794.63 tonnes held at the same time last year.
Economist Sanjeev Sanyal was quoted saying by a news wire, "While no one was watching, RBI has shifted 100 tonnes of its gold reserves back to India from UK. Most countries keep their gold in the vaults of the Bank of England or some such location (and pay a fee for the privilege). India will now hold most of its gold in its own vaults. We have come a long way since we had to ship out gold overnight in 1991 in the midst of a crisis."
Now, the question arises why did India ship its gold reserved into the vault of the Bank of England and what happened in 1991?
Why did India ship its gold reserves to the Bank of England?
Many believe that the 1991 era during which India shifted its gold was a moment of failure. In 1991, the Chandra Shekhar government pledged gold to raise funds because India was facing a severe balance of payments crisis. Between July 4 and 18, the Reserve Bank of India (RBI) pledged 46.91 tonnes of gold with the Bank of England and the Bank of Japan, securing $400 million.
Around 15 years ago, the RBI purchased 200 tonnes of gold from the International Monetary Fund (IMF) under the United Progressive Alliance (UPA) government led by Prime Minister Manmohan Singh, diversifying its assets with a $6.7 billion investment.
In the Modi Government, the RBI has consistently built up its gold reserves. RBI's strategy of holding gold is primarily aimed at diversifying its foreign currency assets, hedging against inflation, and mitigating foreign currency risks.
Since December 2017, the RBI has regularly acquired gold from the market. As a result, the share of gold in India's total foreign exchange reserves increased from 7.75% at the end of December 2023 to about 8.7% by the end of April 2024.