Explained: Why RBI Keeps Gold Reserves In Foreign Vaults

The Reserve Bank of India transferred 100 metric tonnes of gold from the United Kingdom to domestic vaults in FY24, making it one of the largest gold movements since 1991, according to reports. The country's total gold holding now stands at 822 metric tonnes in FY24, with a significant portion stored in foreign vaults, including the Bank of England.

This move comes amid the geopolitical tensions and the West's freezing of Russian assets, which has heightened concerns about the security of overseas assets.

A gold reserve is the gold held by a country's central bank, acting as a backup for financial promises and a store of value. India, like other nations, stores some of its gold reserves in foreign vaults to spread out risk and facilitate international trading. 

Where does the RBI store its gold?

India's gold reserves are primarily stored in the Bank of England, which is known for its stringent security protocols. The RBI also stores a portion of its gold reserves at the Bank for International Settlements (BIS) in Basel, Switzerland, and the Federal Reserve Bank of New York in the United States.

Why does the RBI store its gold in foreign banks?

During India's foreign exchange crisis in 1990-91, the country pledged some of its gold reserves to the Bank of England to secure a $405 million loan, according to reports. Even though the loan was paid back by November 1991, India decided to keep the gold in the UK for convenience.

Storing gold overseas makes it easier for India to trade, engage in swaps and earn returns. However, there are risks involved, especially during times of geopolitical tensions and war. The recent freezing of Russian assets by Western nations has raised worries about the safety of assets kept abroad and the RBI decision to shift a portion of the gold reserve to India could be prompted over these concerns.

Why does the RBI need so much gold?

With its big stash of gold, the RBI can help control local gold prices by using some of it in India. The bank regulator has been buying more gold lately, especially since many other countries are losing faith in the US dollar. Last financial year, the RBI added about 27.47 tonnes of gold to the total reserve, bringing it to 794.63 tonnes. The increased gold reserve works as a hedge against any financial crisis and to take measures to control inflation as well as currency devaluation.