Why does the RBI keep gold overseas? Explained

The Reserve Bank of India has significantly increased its gold purchases this year, acquiring one and a half times the amount of gold it bought in the entire year of 2023 in just the first four months of 2024. Additionally, the central bank has been storing a substantial portion of its gold reserves overseas. However, in light of recent geopolitical tensions and the freezing of Russian assets by the West, the RBI is now planning to repatriate some of these reserves back to India.

Insight: Importance of Overseas Gold Reserves
Storing gold reserves overseas provides logistical convenience for the Reserve Bank of India. It allows for easier access to international markets to acquire gold and facilitates trading through gold certificates and swaps. Additionally, overseas storage serves as a hedge against uncertainties in the global economy and ensures diversification of the central bank’s assets.

How much gold does the Reserve Bank hold overseas?
As of the end of March 2024, the Reserve Bank held a total of 822.10 metric tonnes of gold. Out of this, 408.31 metric tonnes were held domestically, while 387.26 metric tonnes were stored in safe custody with the Bank of England and the Bank for International Settlements (BIS). A further 26.53 metric tonnes were held in the form of gold deposits.

Why does the central bank park a big chunk of the gold abroad?
The decision to keep a significant portion of gold reserves abroad dates back to 1991 when India faced foreign exchange reserve shortages. Although the gold loan taken at that time was repaid, the RBI chose to maintain its reserves in overseas vaults for logistical reasons and trading purposes. However, recent events, such as the freezing of Russian assets by the West, have highlighted the risks associated with holding significant reserves abroad.

What are the risks?
During times of geopolitical tensions, concerns arise regarding the safety of international assets, including gold reserves. The current situation has raised uncertainties about the security of overseas gold holdings, prompting the RBI to consider repatriating a portion of its reserves back to India for safeguarding.

What could RBI do?
In collaboration with the government, the RBI could utilize its gold reserves in the domestic market to manage gold prices and cater to the high demand for investment products like gold exchange-traded funds. This would promote responsible consumption while also fostering a local market for bullion. Moreover, ensuring that gold remains within national borders would enhance India’s economic sovereignty and stability.

Why does the central bank buy gold?
Apart from serving as a hedge against inflation and currency fluctuations, gold reserves play a crucial role in diversifying foreign exchange holdings. Central banks worldwide have been reducing their holdings of US Treasury bonds, reflecting a declining confidence in dollar assets. The RBI’s strategic gold acquisitions aim to mitigate risks associated with over-dependence on traditional assets and enhance the resilience of India’s economic framework.