Gold Reserves: India's Emotional And Economic Anchor In Focus

These conquests led to the plundering of enormous amounts of gold, which were shipped back to Spain, altering the global economy. Similarly, the California Gold Rush of the mid-19th century sparked mass migrations and violent conflicts as thousands flocked to the region in pursuit of wealth. The quest for gold has often ignited wars, colonisation, and exploitation, underscoring its powerful role in shaping human history and economies.

Emotional Connect

For Indians, gold is not just a precious metal but an emotion, deeply ingrained in both personal and national identity. This sentiment was vividly highlighted during the 1991 balance of payments crisis when the Chandra Shekhar government had to pledge the nation's gold reserves, resulting in the sorrowful spectacle of India’s gold being flown to London to avoid bankruptcy.

Ask any family who has had to pledge its gold jewellery to borrow money to weather a crisis. It’s the closest one comes to feeling a loss of self-respect, surrendering their dignity and financial security.

Recently, the Reserve Bank of India (RBI) transferred over 100 tonnes of gold from the UK to its domestic vaults. This marks the first significant addition of gold stock within the country since 1991. Another similar transfer may occur soon, driven by logistical needs and the regulatory desire for diversified storage.

In recent years, the RBI has steadily increased its gold holdings. As of March 2024 end, the RBI's gold reserves stood at 822.1 tonnes, with 413.8 tonnes stored overseas. The RBI, like many other central banks, has been accumulating gold, adding 27.5 tonnes in the last financial year alone. One of the prime reasons for this is the decline in confidence in dollar assets among central banks. According to data from the US Treasury Department, non-US central banks' holdings of US Treasury bonds have dropped from 50.1 percent of total foreign-held US Treasuries in January 2023 to 47.2 percent in January 2024. 

About 15 years ago, the RBI purchased 200 tonnes from the International Monetary Fund, and ongoing acquisitions have continued to build up its stock. This buildup led the RBI to review its storage locations, resulting in the decision to repatriate some gold to India.

Changing Custodians

Historically, the Bank of England has been a major custodian of gold for many central banks, including India, due to its longstanding reputation for security, stability, and financial expertise. As one of the world's oldest central banks, established in 1694, it has served as a trusted depository for gold reserves, offering reliable storage and management. For countries like India, storing gold in the Bank of England provided a safeguard against political and economic instability, particularly during the colonial period and the years following independence. This arrangement ensured that reserves were protected in a secure and stable environment, thereby preserving their value and accessibility in times of need.

This decision to bring back some of the stored gold, will also help the RBI cut down on storage expenses previously incurred with the Bank of England, albeit with modest savings. The transportation of 100 tonnes of gold, nearly a quarter of the domestic stock as of March's end, presented a significant logistical hurdle. Months of meticulous planning and coordination among the finance ministry, RBI, and other government agencies were necessary. The process commenced with securing a customs duty exemption, facilitating the entry of the metal into the country without revenue loss for the Centre on this sovereign asset. However, integrated GST was still applicable, as the tax revenue is distributed among the states.

Globally, central banks have been increasing their gold reserves as a strategic hedge against currency volatility and geopolitical risks. Gold is universally recognised as a safe haven asset due to its intrinsic value and historical stability. By storing gold domestically, the RBI signals its confidence in India’s economic stability and showcases a commitment to safeguarding the nation’s financial future.

All banknotes issued by the Reserve Bank of India (RBI) are backed by a combination of assets such as gold, government securities, and foreign currency assets. This requirement is stipulated in Section 33 of the RBI Act, 1934. The act mandates that for every banknote issued, the RBI must hold an equivalent value in these specified assets to ensure the stability and credibility of the currency. This asset backing provides a safeguard against excessive money printing, thereby maintaining public confidence in the value of the currency. 

Gold and foreign currency reserves, in particular, serve as vital components in this system, offering a hedge against currency volatility and ensuring that the banknotes retain their purchasing power and stability in both domestic and international markets. This is a much prudent way of managing currencies, compared to a market like the US which keeps printing currency by the minute.

Examples of gold as a strategic hedge are evident in several countries. The United States holds the largest gold reserves in the world, with over 8,000 tonnes stored primarily at Fort Knox. This massive reserve acts as a financial buffer and supports the U.S. dollar’s status as the world’s primary reserve currency. 

Similarly, after World War II, Germany stored much of its gold abroad due to security concerns. However, in recent years, the Bundesbank has repatriated significant amounts of gold from New York and Paris back to Frankfurt. This move was driven by a desire for increased control over their gold reserves and to reassure the German public of their economic security. Additionally, the People’s Bank of China has steadily increased its gold holdings over the past decade. This accumulation of gold is part of China’s strategy to diversify its foreign exchange reserves and reduce reliance on the U.S. dollar, especially amidst trade tensions and geopolitical uncertainties.

Why Gold is a Strategic Hedge

Hedge Against Currency: Gold maintains its value even when currencies fluctuate. For instance, during times of high inflation or currency devaluation, gold prices typically rise, thus protecting the purchasing power of reserves.

Geopolitical Stability: In times of geopolitical turmoil, gold’s value often increases as investors seek safe-haven assets. For example, during the 2008 financial crisis, central banks around the world increased their gold purchases as a protective measure against market instability.

Diversification of Reserves: Central banks diversify their reserves to mitigate risk. Gold acts as a counterbalance to other assets like government bonds and foreign currencies. This diversification reduces the risk of overall reserve depreciation due to market movements.

Economic Confidence: Holding and repatriating gold can signal a country’s economic strength and stability. For the RBI, bringing gold back to India not only saves on storage costs abroad but also demonstrates a robust economic posture to both domestic and international audiences.

In essence, gold transcends its material value in India, symbolising security, pride, and economic resilience. Similar to how most middle-class households in India, where the matriarch quietly saved and acquired gold over time as a financial safety net, the Reserve Bank of India (RBI) has demonstrated this practice on a larger global scale. Looks like RBI's embrace of gold: not just an edge, but a golden hedge against economic uncertainty.

Srinath Sridharan is a Mumbai based corporate advisor and policy researcher. Views are Personal