Why is the Reserve bank bringing back its gold assets to India?

Why is the Reserve bank bringing back its gold assets to India?

Sub: Eco

Sec: External Sector

RBI’s Gold Repatriation:

• The Reserve Bank of India (RBI) has repatriated nearly 130 metric tonnes of gold held at the Bank of England over the last two and a half years.
• Gold brought back from overseas has resulted in a 60 per cent increase in the RBI’s domestic gold holding in the same period
• This shift aims to increase the RBI’s domestic gold holdings and reduce dependency on foreign storage.

Increase in Domestic Gold Holdings:

• RBI’s domestic gold stock rose to 46 metric tonnes by September 2024, up from 295.82 metric tonnes in March 2022.
• A significant portion (324 metric tonnes) remains with the Bank of England.

Overall Increase in Total Gold Reserves:

• RBI added 85.13 metric tonnes to its reserves since March 2022, resulting in total gold reserves reaching 854.73 metric tonnes by September 2024.
• Reserve Bank has been buying gold as a part of its reserves management, and the quantum held outside was going up.
• This represents a rise in the valuation of gold holdings due to increased gold prices globally.

Why is gold shipped back to India:

• The RBI cited increased physical storage capacity as a reason for bringing gold back to India, focusing on securing its gold domestically.
• RBI Governor Shaktikanta Das indicated that while some gold will remain abroad, domestic storage has been prioritized.
• The RBI purchases gold from international sources, including the International Monetary Fund (IMF) and the World Bank. The gold purchased by the RBI is kept with the Bank of England.

Historical Context:

• Historically, India has kept most of its gold reserves in foreign central banks (e.g., Bank of England) for safekeeping.
• In 1991, during a balance of payments crisis, India shipped 47 tonnes of gold to Bank of England to secure international loans.

Geopolitical Risks:

• The RBI’s move aligns with a global trend where central banks are increasing domestic gold reserves due to geopolitical uncertainties and rising inflation.
• Sanctions on Russia following the Ukraine conflict influenced central banks to strengthen local reserves.

India’s Gold Purchases and External Holdings:

• India continues to buy gold internationally, supported by institutions like the IMF and the World Bank.
• The recent increase in India’s foreign exchange reserves adds strength to its gold holdings.

Global Trends in Central Bank Gold Buying:

• The Bank of England has one of the world’s largest gold vaults. It is the second-largest custodian of gold in the world, after the New York Federal Reserve.
• Almost all the central banks in the world have kept their gold in the safe custody of the Bank of England— its gold vaults hold around4lakh bars of gold. Moreover, there’s a cost involved in safe-keeping of gold abroad
• Central banks worldwide, especially from emerging economies, are buying gold as a hedge against inflation and geopolitical instability.
• The Bank of Baroda’s Chief Economist highlighted that gold purchases offer security against dollar volatility and enhance financial stability.

This summary captures key points from the article relevant to the topics of Indian economy, RBI’s monetary policy, and geopolitical economic strategies, which are useful for UPSC exam preparation.