Why RBI Repatriated 100 Tonnes of Gold from the UK: An Analysis

Overview of RBI’s Gold Reserves

As of March 2024, the Reserve Bank of India’s (RBI) total gold reserves amount to 822.10 metric tonnes, with a significant portion previously stored abroad. Historically, India, like many other nations, has held its gold with the Bank of England. Recently, the RBI transferred 100 metric tonnes of gold from the UK back to India. This move is one of the largest gold transfers by India since 1991, when gold reserves were pledged to address a foreign exchange crisis.

Current Gold Holdings

The RBI’s gold reserves are now split almost evenly between domestic and international vaults. With the recent transfer, over 408 metric tonnes are stored locally, while 413.79 metric tonnes remain abroad. According to the central bank’s FY24 annual report, 308 metric tonnes are held in India as backing for currency notes, and another 100.28 tonnes are held locally as an asset of the banking department.

Historical Context

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 continued to store gold in the UK for logistical reasons. Gold held abroad can be easily traded, used in swaps, and can earn returns. Moreover, the RBI purchases gold from international markets, and overseas storage facilitates these transactions.

Geopolitical Risks

Storing gold abroad carries risks, especially during geopolitical tensions. Recent events, such as the freezing of Russian assets by Western nations, have raised concerns about the safety of assets held overseas. The RBI’s decision to repatriate gold from the UK likely reflects these concerns, aiming to safeguard its assets from potential geopolitical threats.

Utilization of Domestic Gold Reserves

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 (ETFs). This strategy supports the development of a robust local bullion market while ensuring that gold reserves remain within the country.

Increased Gold Purchases

In 2024, the RBI significantly increased its gold purchases. In the first four months of the year, it acquired one and a half times the gold it bought during the entire previous year. This aggressive buying is partly driven by declining confidence in dollar assets among central banks globally. Data from the US Treasury Department shows a decrease in non-US central banks’ holdings of US Treasury bonds from 49.8% in March 2023 to 47.1% in March 2024.

Strategic Diversification

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