RBI’s Repatriation of Gold from UK to India

19-07-2024

In July 2024, the Reserve Bank of India (RBI) has taken a strategic step by bringing back over 100 tonnes of gold from the UK to its domestic vaults.
This is the largest repatriation since the early 1990s and reflects the RBI's evolving approach to managing its gold reserves.

Historical Background

During the 1990-91 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 kept the gold in the UK for logistical reasons, as gold stored abroad can be easily used for trading, entering into swaps, and earning returns.
Repatriation means to send or bring money or other property, back to the country.
The repatriation of gold reserves does not affect India's GDP, tax collections, or the RBI's balance sheet, as it only involves a change in the storage location (the total gold asset of the RBI remains the same).
There are no customs or GST implications associated with this transfer, as the gold being repatriated is already owned by India.

Liability	Asset
Currency Deposits of Government Banks Loans (including securities) Other Liabilities Capital Account Paid-up Capital Reserves	Gold Loans and advances to Government Banks Investments in Government securities Foreign Assets Other Assets

How Much Gold Does RBI Have?

Gold Stock:

The Reserve Bank of India Act, 1934 provides the legal framework for the deployment of reserves in foreign currency assets and gold within parameters of currencies, instruments, issuers, and counterparties.
As of March 2024, the RBI held 820 tonnes of gold, with 410 tonnes stored domestically and 410 tonnes still held with foreign institutions like the Bank of England and the Bank for International Settlements (BIS).
As of April 2024, the share of gold is USD 54 billion in India's current forex reserve of USD 650 billion.

History of Gold Purchasing:

According to the World Gold Council, the RBI is among the top five central banks buying gold.
The RBI purchased 200 tonnes of gold during the global financial crisis in 2009.
In FY 2022, the RBI bought 65 tonnes of gold, 34 tonnes in FY 2023, and 19 tonnes in FY 2024.

Gold Reserves in India

Total Reserves: According to the National Mineral Inventory, India had 500 million tonnes of gold ore reserves as of 2015.
Distribution of Resources:

Bihar: 44%
Rajasthan: 25%
Karnataka: 21%
West Bengal: 3%
Andhra Pradesh: 3%
Jharkhand: 2%

Karnataka contributes around 80% of the country's total gold production. The Kolar Gold Fields (KGF) in Kolar district are among the oldest and deepest gold mines globally.

Other Major Buyers of Gold

People's Bank of China: This bank remains a significant gold purchaser. As per the World Gold Council (WGC) report (April 2024), China led gold purchases among central banks in the first quarter of 2024.
Central Bank of Turkey: By April 2024, the Central Bank of Turkey had bought 8 tonnes of gold, increasing its total holdings to 578 tonnes.
Emerging Market Economies: Central banks from emerging economies consistently lead the gold-buying trend, as highlighted by the WGC report.

Why Did the RBI Decide to Move the Gold Back to India?

Protection Against Inflation: Gold retains value well during high inflation. Unlike currencies, gold can appreciate in price during inflation, offering the RBI potential returns even in tough economic times.
Hedge Against Geopolitical Uncertainty: Current geopolitical events, like the Russia-Ukraine war and the subsequent sanctions on Russia, prompted the RBI to secure its assets within India.

Gold is considered a safe haven during geopolitical uncertainties.

Diversification and Liquidity: Adding gold to its reserves helps the RBI diversify its foreign exchange holdings.

Gold is a secure and liquid asset, easily traded on the international market at transparent prices.
This provides the RBI with flexibility and additional options for managing its reserves.

Strength and Confidence: Moving gold back demonstrates India's strong economic growth and its capability to protect its financial assets.

It signifies confidence in the Indian economy's stability, contrasting with the 1991 economic crisis when India had to pledge gold reserves for foreign currency.

Storage Charges: Returning the gold to India eliminates the storage costs paid to the Bank of England.

Significance of Gold in the Economy

Limited Supply & Intrinsic Value: Gold has a finite (limited) supply due to geological limitations, unlike currencies that can be printed at will by central banks.

Its scarcity (shortage), unique physical properties, and historical significance give gold intrinsic value.

Hedge Against Inflation: Gold holds its value well during inflation, making it a reliable hedge.

A 2023 World Gold Council study found a positive correlation between gold prices and US inflation over 50 years.

Diversification & Stability: Gold diversifies a country's foreign reserves, reducing dependence on a single currency and offering stability during economic challenges.

Holding gold reserves signals international investors' confidence in a country's economy.

Jewellery & Cultural Significance: The demand for gold in jewellery remains strong globally, especially in regions like India and China.

Gold holds cultural significance in many societies, further influencing its value and demand.

Historical Regime of Exchange Rate Management

The Gold Standard (1870-1914)

Currencies were directly tied to the value of gold, and each country held gold reserves to back their currency.
Stable exchange rates made international trade easier and more predictable.

Drawbacks:

Limited gold supply made it difficult to expand the money supply to meet economic growth.
Countries lost gold reserves when they had trade deficits, potentially harming their economies.
Gold discoveries or losses could cause sudden fluctuations in exchange rates.

The Bretton Woods System (1944-1971)

Established after World War II, it aimed to create a stable and predictable international financial system.

Key Feature:

Fixed exchange rates with the US dollar as the reserve currency, and other currencies pegged to the dollar at a fixed rate.
The US dollar was convertible to gold at a fixed price of USD 35 per ounce.

Challenges:

The Triffin Dilemma: The US couldn't maintain its gold reserves to support the system as the global economy grew.
US trade deficits created doubts about its ability to maintain the gold peg.

The Current Scenario (Multiple Regimes - Post-1971)

Exchange rates are determined by market forces of supply and demand with various regimes.
Floating and Fixed Exchange Rates: A floating exchange rate is determined by the private market through supply and demand.

A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate.
The reasons to peg a currency are linked to stability. Especially in today's developing nations, a country may decide to peg its currency to create a stable atmosphere for foreign investment.

Pegged Rates: A country ties its currency to a strong currency (e.g., USD) or a basket of currencies.
Dollarization: Some countries adopt the US dollar, eliminating exchange rate risk but giving up control over monetary policy.

Special Drawing Rights (SDRs)

Created by the IMF as a supplement to gold reserves.
SDRs are a basket of major currencies, not directly convertible to gold.
The price of gold is determined by supply and demand in the free market, not by its connection to currencies.

Conclusion

The RBI's decision to repatriate over 100 tonnes of gold from the UK to its domestic vaults is a significant strategic move.
This 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 seeking to enhance the security of their foreign exchange reserves during uncertain times.