In a significant move, the Reserve Bank of India has brought back 100 tonnes of gold to its domestic vaults for the first time since early 1991. A similar amount of gold may be brought into the country in the following months. The move was undertaken for logistical and diversified storage purposes, TOI reported.
Currently, the RBI has 822.1 tonnes of gold, with about 413.8 tonnes held overseas. Central banks have purchased gold in recent years, with 27.5 tonnes acquired over the previous fiscal year. As per the World Gold Council data, India witnessed an increase of 18.51 tonnes in its gold reserves followed by Kazakhstan and Singapore.
“RBI started purchasing gold a few years ago and decided to undertake a review of where it wants to store it, something that is done from time to time. Since the stock was building up overseas, it was decided to get some of the gold to India,” TOI quoted an official as saying.
From pledging gold during the 1991 economic crisis to bringing it back: The paradigm shift
It is interesting to note that the RBI purchased 200 tonnes of gold from the International Monetary Fund 15 years ago. Recently, the Indian central bank has steadily increased its stock acquisitions. RBI bringing back chunks from its gold reserves in the Bank of England (BoE) reflects India’s economic strength and confidence.
While today there is a significant increase in India’s gold reserves and the country’s gold stocks building up overseas, the situation was not always this astoundingly positive for India. In our country, gold is an emotion, beyond fashion statement, gold jewellery especially, is the wearable wealth and financial security for Indian families.
Back in 1991, Samajwadi Janata Party leader Chandra Shekhar headed a minority government of a breakaway faction of the Janata Dal with outside support from Congress. At that time, India faced a severe balance of payments crisis, one of the worst in its post-independence history. The fiscal deficit had ballooned to unsustainable levels, driven by high government expenditure and low revenue generation. This imbalance severely strained the country’s finances. India’s external debt had increased significantly during the 1980s.
A large portion of India’s foreign exchange reserves were being consumed in debt servicing. By mid-1991, India’s foreign exchange reserves had plummeted to critically low levels, falling from $1.2 billion in January 1991 to half by June 1991. This was barely sufficient to cover two weeks of imports. This posed a threat to India’s ability to finance the import of oil and other essentials. It is also essential to note that the years 1990 and 1991 marked political instability in the country, as a weak coalition was at the helm of power led by then-Prime Minister Chandra Shekhar.
In response to the devastating economic situation, the Chandra Shekhar government decided to pledge a portion of India’s gold reserves as collateral for foreign exchange borrowing. The government promised around 47 tonnes of gold to international creditors. This gold was sent to the Bank of England and the Union Bank of Switzerland to serve as collateral for loans totalling over $405 million. The cash collected via this arrangement gave immediate relief to India’s foreign exchange problem, allowing the country to continue importing necessary items and performing fundamental economic tasks.
For those of my generation, the shipping out of gold in 1990-91 was moment of failure that we will never forget. This is why this shipping back of gold has a special meaning pic.twitter.com/ufMCjHFSMH
— Sanjeev Sanyal (@sanjeevsanyal) May 31, 2024
This brought immediate relief to the Indian economy while causing emotional trauma and a dent in India’s reputation globally. The 1991 crisis, however, acted as a catalyst for broader economic reforms like liberalisation in the subsequent PV Narasimha Rao-led government.
Is RBI on a gold purchasing spree?
The current Modi government has taken a lesson from history and focussed on increasing India’s gold reserves to enhance the diversity of forex reserves and mitigate risks linked to inflation and foreign currencies. This is reflected in the fact that in December 2014, the RBI held 557.75 tonnes of gold and now the bank holds over 822 tonnes of gold (8.98%). In November 2023, RBI bought 9 tonnes of gold. In February this year, RBI revealed a 6-tonne increase in gold holdings.
Dependence on overseas vaults for gold reserves and how it is problematic in a changing world
It is pertinent to note that gold reserves are a stable store of value that protects against inflation and currency depreciation. If a country’s currency weakens globally, gold reserves help to protect the country’s purchasing power and economic stability. It protects the country’s balance of payments and international trade involvement.
Many countries including India store their gold reserves overseas. The United Kingdom’s central bank—the Bank of England is a storehouse of gold reserves of many countries. It is the second-largest custodian of gold in the world, after the New York Federal Reserve. While storing gold elsewhere helps diversify risk it comes with its own political, geopolitical, economic, legal and logistical risks. It is thus remarkable on the part of RBI and the Modi government to bring a significant portion of its gold reserves from BoE to India’s domestic vaults.
The case of Venezuela, Iran and Libya serves as an example of how countries face issues in repatriating their gold. In recent years, Venezuela struggled to repatriate its gold reserves due to political tensions and international sanctions.
In July 2020, the UK High Court ruled that the British government officially recognized opposition leader Juan Guaidó as the interim president of Venezuela, rather than Nicolás Maduro who won the 2018 election which many countries deemed fraudulent. This ruling directly impacted the control over Venezuela’s 31 tonnes of gold held by the Bank of England, worth approximately $1 billion. Maduro’s government tried to access the gold to fund its measures to combat the Covid pandemic the BoE denied it since the UK government recognised Guaidó as the legitimate leader. In the UK, the two rival boards of Venezuela’s Central Bank became involved in two legal disputes over Venezuela’s gold reserves held by Deutsche Bank and the Bank of England. A legal battle continues over who will control Venezuela’s gold reserves frozen in BoE especially when Guaidó is no longer recognised as the President of Venezuela.
In Iran’s case, its gold reserves held overseas have been subject to international scrutiny and restrictions, primarily due to economic sanctions imposed by the United States and its allies. These sanctions aim to curb Iran’s nuclear program by limiting its access to global financial resources. Due to this, its gold reserves in foreign banks including the Bank of England have been frozen inflicting severe financial damage to the Islamic nation. Besides, European banks, under the influence of both EU and US sanctions, have also frozen Iranian gold reserves.
In Libya’s case, due to the prolonged conflict and political instability in Libya since the fall of Muammar Gaddafi in 2011, significant portions of these reserves have been frozen. Notably, Libya holds approximately 146.65 tonnes tonnes of gold as part of its national reserves.
How gold helped Russia thrive despite the West’s sanctions
Interestingly, ever since Russia led by President Vladimir Putin launched an offensive against Ukraine, it has faced over 16,500 sanctions from the US, UK, EU and several other countries. Despite this, the Russian economy continued to grow. Alongside, seaborne crude oil, Russia’s gold strategy contributed to its growth. Russia’s $300 billion worth of reserves in the West were frozen when its foreign currency and gold reserves totalled $612 billion. While its assets invested in foreign securities, bank deposits and nostro correspondent accounts were frozen, Russia’s gold reserves were held in Russia. The country has been selling gold to countries like the UAE and Russia continues to be the second-largest producer of gold. The West’s sanctions could literally cause no damage to Russia’s gold market.
From @Breakingviews: Western sanctions have frozen a chunk of Russia’s foreign exchange reserves. But Russia has about $140 billion in bullion that’s beyond the direct reach of sanctions. @GinaChon says that makes gold one of Vladimir Putin’s few silver linings pic.twitter.com/Kg39ulj7Is
— Reuters (@Reuters) March 29, 2022
Keeping gold reserves domestically is beneficial for India
In changing times especially when several countries are engaged in violent conflicts and face the risks of sanctions and boycotts etc, it is crucial to keep a significant portion of gold reserves domestically, especially for an emerging superpower like India. Notably, increasing gold reserves is politically beneficial because it demonstrates that a country’s economy is robust and trusted by other countries and global financial organisations. Large gold reserves reflect the country’s good money management and aid planning finances for the long term. The cases of Venezuela and other countries suggest that domestic storage of gold is important for India since it allows a country autonomy thus mitigating the risk of foreign entities imposing any sort of restriction or causing delay. It also allows India to make independent policy decisions regarding its reserves without external interference or geopolitical pressures.
Furthermore, since storing gold overseas carries the risk of foreign governments seizing or freezing assets, especially in times of international disputes or sanctions, domestic storage mitigates this risk. In addition, having gold reserves in domestic vaults also cut the cost of international logistics thus providing immediate liquidity support. Thus, by focusing on these factors, India could more effectively protect its national wealth and keep more potent control over its financial stability. Bringing back 100 tonnes of gold from the UK is a significant move in this direction.
