“RBI bring back the $100mn Gold”news making headlines ever since. While the repatriation has no financial implications of any form or kind, it is a crucial fiscal event for the economy, notably 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.
India’ Gold Reserves.
As of the end of March 2024, the RBI held 822.10 tonnes of gold, with 408.31 tonnes stored domestically and the remaining 413.79 tonnes are still held in custody with foreign institutions like the Bank of England and the Bank for International Settlements (BIS).
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.
Why does the RBI keep Gold abroad?
In the 1990s, India faced a critical situation where its foreign exchange reserves were depleted to the extent that they could only cover a few weeks’ worth of imports (15days in precise), to address the foreign exchange crisis, India pledged part of its gold reserves to the Bank of England to secure a USD 405 million loan.
Although the loan was repaid by November 1991, the RBI chose to keep the gold in the UK for logistical reasons. Besides gold held in the form of certificates could be used for trading,enteringswaps, and earning a small return.The RBI also buys gold from international markets, and storing it overseas facilitates these transactions.
Why bringing the Gold back now?
The RBI Governor said that the move to transfer gold reserve from the UK to India, is purely for logistical reasons as there is enough storage capacity domestically.
However, 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. As geopolitical tensions can create uncertainty about the safety of international assets.
Any financial implications of bringing back the gold reserves?
The repatriation of gold reserves has no financial implications for India’s GDP, tax collections, or the RBI’s balance sheet, as it only involves a change in the storage location of the gold (the total gold asset of the RBI will remain the same).
There are no customs or GST implications associated with this transfer, as the gold being repatriated is already owned by India.
The move of bringing back the gold reserves from UK reflects the central bank’s focus on logistical efficiency, diversified storage, and confidence in the Indian economy’s stability. This action aligns with global trends among central banks, as they seek to enhance the security of their foreign exchange reserves during uncertain times.
