Why RBI Stores Gold Reserves In Foreign Vaults? Why Is It Bringing Back Tonnes of Gold From UK?

The Reserve Bank of India (RBI) has moved 100 metric tonnes of its gold reserves stored in the vaults in the UK to India in financial year 2023-24. For the first time since 1991, such a large quantity of gold has been repatriated to India. The RBI plans to transfer more quantity of gold in the coming months.

According to the annual report of the RBI for FY24 released on Thursday, over 308 metric tonnes of gold is held in India as backing for notes issued, while 100.28 tonnes more are held locally as an asset of the banking department. Of the overall gold reserves, 413.79 metric tonnes are held abroad, the report stated. According to the news agency PTI, the gold held locally is stored at high security vaults and facilities in Mumbai and Nagpur.

Why RBI moved gold to India?

The move highlights the RBI’s strategic thinking in managing its foreign exchange reserves by repatriating gold to reduce dependency on foreign storage and associated costs. It also indicates a proactive approach in safeguarding the nation’s economic interests.

The transfer helps in saving on storage fees paid to foreign custodians, and indicates confidence in the country’s economic stability, according to The Economic Times.

What are gold reserves?

The RBI holds gold reserves as a guarantee to redeem promises to pay depositors, note holders, or trading peers or as a store of value or to support the value of the national currency.

According to the World Gold Council (WGC) estimates, all the gold ever mined and accounted for totalled 190,040 metric tonnes in 2019, but other independent estimates vary by as much as 20%. At a price of $1,250 per troy ounce ($40 per gram), reached on August 16, 2017, one metric tonne of gold has a value of approximately $40.2 million. The total value of all gold ever mined, and that is accounted for, would exceed $7.5 trillion at that valuation and using WGC 2017 estimates.

The RBI joins Monetary Authority of Singapore, the People’s Bank of China and the Central Bank of the Republic of Turkey that are buying gold due to depreciation of the dollar, negative interest rates and to diversify their foreign exchange reserves, according to the WGC.

According to the International Monetary Fund, as of May 3, 2024, India ranks ninth in terms of sovereign gold holdings while the US tops the list. The US’ gold holdings amount to 8,133.5 metric tonnes comprising 71.3% of its forex reserves. India’s gold holdings amount to 827.69 metric tonnes comprising 8.9% of its forex reserves. Other countries ahead of India in terms of gold holdings are Germany, Italy, France, Russia, China, Switzerland and Japan.

Why RBI Stores Gold In Foreign Countries?

Like other countries, India also stores gold in foreign countries in different locations to mitigate the risk associated with geopolitical instability or regional conflicts that can impact the accessibility of reserves.

Gold held in key financial hubs like London, New York and Zurich can be accessed for international transactions. These cities are major centres for gold trading, making it easier for other countries to convert their gold into cash or use it as collateral for loans and other financial instruments. India has chosen to store a significant portion of its gold reserves with the Bank of England and the Bank for International Settlements (BIS).

The Bank of England has a long-standing reputation as a trusted custodian of gold reserves, which influenced India’s decision to store a portion of its gold reserves there. The vaults in the Bank of England are protected by a variety of security measures, including comprehensive surveillance systems, reinforced doors and strict access protocols.

The Bank for International Settlements (BIS), established in 1929, is an international financial institution, which is owned by member central banks. Its primary goal is to foster international monetary and financial cooperation while serving as a bank for central banks.

The BIS is based in Basel in Switzerland with representative offices in Hong Kong and Mexico City.

Other Foreign Vaults

Fort Knox Bullion Depository at Fort Knox in Kentucky, US, is protected by multiple layers of security, including a solid granite perimetre, alarms, video cameras, armed guards, and a combination of security measures involving the US Army and the US Mint Police.

Another major gold vault in the US is the Federal Reserve Bank of New York. Located 80 feet below street level and 50 feet below sea level, the vault is encased in a 90-tonne steel cylinder. Security includes advanced technology, armed guards, and stringent access controls.

The Deutsche Bundesbank in Frankfurt, Germany, has advanced electronic surveillance, strict access controls, and coordination with local and federal security agencies to safeguard gold.

The Banque de France in Paris, France, employs sophisticated security measures, including high-security vaults, surveillance systems, and armed guards.

Apart from the BIS, there is the Swiss National Bank and Zurich Vaults. The vaults feature state-of-the-art security measures, including reinforced structures, biometric access controls, and continuous monitoring.