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Bringing back over 100 tonnes of gold from the UK !

Recently, the Reserve Bank of India (RBI) has undertaken a significant strategic move by bringing back over 100 tonnes of gold from the UK to its domestic vaults. This has marked the largest such repatriation since the early 1990s and signifies the RBI's evolving approach to managing its gold reserves.

In the fiscal year 2024, the Reserve Bank of India (RBI) moved 100 metric tonnes of gold from the United Kingdom to domestic vaults. This is one of the largest gold transfers since 1991. India's total gold reserves now amount to 822 metric tonnes in FY24, with a significant portion kept in foreign vaults, including the Bank of England. This decision is influenced by geopolitical tensions and concerns about the security of overseas assets, particularly in light of recent events like the freezing of Russian assets by Western nations. Gold reserves are crucial for a country's central bank as they serve as a backup for financial commitments and provide a stable store of value. Like many other nations, India diversifies its gold holdings by storing some of it in foreign vaults, which helps spread out risk and facilitates international trade.

History Behind RBI Store Its Gold In the United Kingdom

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 totaling 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.

Why Did The RBI Move Gold To India?

1. Protection Against Inflation: When inflation is high, gold tends to hold its value well. Unlike currencies that can lose purchasing power due to inflation, gold's historical performance suggests it can even appreciate in price during these times. This provides the RBI with the potential for good returns even in challenging economic situations.
2. Hedge Against Geopolitical Uncertainty: The current geopolitical climate, with events like the Russia-Ukraine war which has triggered a wave of sanctions on Russia by Western nations, leading to the freezing of Russian assets held abroad might have caused some concern for the RBI to control its assets by moving them in their own wallets. Gold is also seen as a safe haven during such uncertainties.
3. Diversification and Liquidity: Including gold in its reserves allows the RBI to diversify its foreign exchange holdings. Gold is a secure and liquid asset  (can be easily bought and sold on the international market at a transparent price). This provides the RBI with flexibility and additional options for managing its reserves.
4. Strength and Confidence: It will show India's robust economic growth and its ability to safeguard its financial assets and indicate confidence in the Indian economy's stability. This contrasts with the 1991 economic crisis when India had to pledge gold reserves for foreign currency.
5. Storage Charges: Bringing the gold back eliminates storage costs paid to the Bank of England.

Implications Of The RBI’s Transfer Of Gold

1. Economic Signal: The transfer of 100 tonnes of gold back to India from the UK will send a powerful message to global markets about India’s robust economic state and policies. It can be committed to safeguarding its financial assets.  RBI sent a message to manage its assets securely, by choosing to store a significant portion of its gold reserves domestically. This move reassures international investors and financial markets that  RBI or India is serious about their assets and maintains financial stability and protection from potential risks. It will also reflect India’s intent to reduce dependency on foreign custodians, thereby minimising exposure to geopolitical risks and financial volatilities.

2. Enhanced Security: Storing  Gold in India will enhance security by reducing the risks associated with holding it in foreign countries. There are risks to holding the gold abroad like Geopolitical tensions, changes in international relations, and financial sanctions. If anything occurs, there is a possibility of freezing the gold.  RBI wants to bring the gold back to India to reduce the risks and ensure that the assets are under direct national jurisdiction. Moreover, domestic storage of gold also eliminates the uncertainties linked with foreign vaults and custodians. After transferring the gold to India, gold is now subject to Indian laws and regulations. Hence, this movement enhances the overall security of the  RBI’s  Gold.
3. Increased Confidence: To transfer the RBI reserve gold back to India, will boost confidence among both domestic and international stakeholders. People can trade on gold which is stored abroad, but it can be relaxing news for the stockholder. Moreover, This increased confidence can attract more foreign investment, contributing to economic growth and stability.
 

Keeping Gold Reserves Domestically Is Beneficial For India

In today's world, where conflicts and the threat of sanctions are common, it's important for countries like India to keep a lot of their gold within their own borders. This is especially true for countries that are becoming more powerful, like India. Keeping gold at home serves a few purposes. First, it shows other countries and big financial organisations that India is strong and reliable with its money. When a country has a good amount of gold, it tells the world that it's good at handling its finances and planning for the future.
Recent situations in places like Venezuela show why it's smart to keep gold at home. It means India can make its own decisions about its gold without being pushed around by other countries. It also helps protect India's money if there are fights between countries or if some countries try to put sanctions on India. Having gold at home also means India doesn't have to worry as much about other countries taking its gold or freezing its assets during arguments or sanctions. This helps keep India's money safe and stable.
Plus, keeping gold in India cuts down on the costs of storing it far away. This means India can get its hands on money quickly when it needs it. Overall, by focusing on these things, India can make sure its money is safe and that it has control over its finances. Bringing back 100 tonnes of gold from the UK is a big step in that direction.

Way To Forward

The RBI might bring more gold back to India. This means they'll increase the amount of gold kept in the country. They're doing this to make their storage and transport plans more efficient. Also, by having gold in different places, they're making sure it's safer and cheaper. This move could help strengthen the country's economy and make it more secure.

Conclusion
The RBI is bringing back more than 100 tons of gold from the UK to its own vaults in India. This is a big move and shows that the central bank wants to be more efficient with how it handles gold, storing it in different places for safety. It also shows that the RBI is confident in India's economy. Other central banks around the world are doing similar things, trying to keep their reserves safe during uncertain times.