What made RBI move 100 tonnes of gold from UK to its vaults? Here's an explainer

The Reserve Bank of India (RBI) has moved 100 metric tonnes of its gold stored in the UK to domestic vaults in FY24. This significant transfer marks one of the largest movements of gold by India since 1991, when a portion of the gold reserves was pledged to tackle a foreign exchange crisis.

So, how much gold does RBI hold?

As of March 2024, the RBI's total gold reserves stand at 822.10 metric tonnes. A substantial part of the precious commodity is stored abroad. India also had its holding with the Bank of England like other countries. The movement of 100 metric tonnes into India has taken the overall quantity stored locally to over 408 metric tonnes of gold, which means the local and foreign holding is now split almost evenly.

As per the annual report of the central bank for FY24 released this Thursday, over 308 metric tonnes of gold is held in India as backing for notes issued, while another 100.28 tonnes is held locally as an asset of the banking department.

Of the overall gold reserves, 413.79 metric tonnes is held abroad, the annual report said.

Why does RBI store its gold abroad?

Historically, during the 1990-91 foreign exchange crisis, India pledged part of its gold reserves to the Bank of England to secure a $405 million loan. Although the loan was repaid by November 1991, the RBI chose to keep the gold in the UK for logistical reasons. Gold stored abroad can be easily used for trading, entering into swaps, and earning returns. The RBI also buys gold from international markets and storing it overseas facilitates these transactions.

Storing gold internationally comes with risks, particularly during geopolitical tensions. The freezing of Russian assets by Western nations has heightened concerns about the safety of assets held abroad. The RBI's recent move to repatriate gold from the UK likely reflects these concerns.

What will RBI do with so much gold?

The RBI, in consultation with the government, can use domestically held gold to manage local gold prices, especially given the high demand for investment products like gold exchange-traded funds. This strategy helps in developing a robust local bullion market while ensuring that gold reserves remain within the country.

The RBI has ramped up its gold purchases significantly. In just the first four months of 2024, the RBI bought one and a half times the gold it acquired in the entire previous year. This aggressive buying is partly due to a decline in confidence in dollar assets among central banks globally. Data from the US Treasury Department shows that non-US central banks' holdings of US Treasury bonds have dropped from 49.8% in March 2023 to 47.1% in March 2024.

In FY24, the RBI added 27.47 tonnes of gold to its reserves, increasing the total from 794.63 tonnes the previous year. This move is part of a broader strategy to diversify foreign exchange reserves and hedge against inflation and currency volatility.

The RBI's strategy of holding and managing gold reserves, both domestically and internationally, is driven by logistical considerations, market strategies, and geopolitical risks. The recent repatriation of gold from the UK underscores the dynamic nature of the RBI's approach to safeguarding and utilizing its gold assets.