Explained | Why India stores its gold reserves in foreign vaults

With the Reserve Bank of India bringing back 100 metric tonnes of gold reserves stored in the Bank of England, the question arises as to why India stores its gold reserves in foreign vaults. What are the foreign vaults where India stores its gold reserves? What are the major foreign gold vaults and what kind of security do they offer? ETV Bharat finds out.

New Delhi: The news is that India has moved 100 metric tonnes of its gold reserves stored in the UK to domestic vaults in financial 2023-24. But, the fact of the matter is that this is only a part of the Reserve Bank of India (RBI)’s gold reserves that are stored in foreign vaults. 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.

So, what is a gold reserve and why do central banks hold such reserves?

A gold reserve is the gold held by a national central bank, intended mainly as a guarantee to redeem promises to pay depositors, note holders (e.g. paper money), or trading peers, during the eras of the gold standard, and also as a store of value, or to support the value of the national currency.

The World Gold Council (WGC) estimates that all the gold ever mined, and that is accounted for, totalled 190,040 metric tonnes in 2019, but other independent estimates vary by as much as 20 per cent. 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 is among the top five central banks that are buying gold, according to the WGC. Several central banks such as the Monetary Authority of Singapore, the People’s Bank of China and the Central Bank of the Republic of Turkey have been purchasing gold due to the depreciation of the dollar, negative interest rates and for the purpose of diversifying their foreign exchange reserves.

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 percent of its forex reserves. On the other hand, India’s gold holdings amount to 827.69 metric tonnes comprising 8.9 percent of its forex reserves. Other countries ahead of India in terms of gold holdings are Germany, Italy, France, Russia, China, Switzerland and Japan.

Why does the RBI store its gold reserves in foreign vaults?

India, like many other countries, stores a significant portion of its gold reserves in foreign vaults. This practice is driven by several strategic, economic and security considerations. By holding gold reserves in multiple locations around the world, India can mitigate the risk associated with geopolitical instability or regional conflicts that might impact the safety and accessibility of its reserves if they were stored solely within its own borders.

Gold held in key financial hubs like London, New York and Zurich can be readily 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).

India ranks ninth in terms of sovereign gold holdings while the US tops the list. (Infographics: ETV Bharat)

India has historical ties with the UK, dating back to the colonial era. The Bank of England has a long-standing reputation as a trusted custodian of gold reserves, which may have influenced India’s decision to store a portion of its 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 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. With its establishment in 1929, its initial purpose was to oversee the settlement of World War I war reparations.

The BIS carries out its work through its meetings, programmes and through the Basel Process, hosting international groups pursuing global financial stability and facilitating their interaction. It also provides banking services, but only to Central Banks and other international organisations. The BIS is based in Basel, Switzerland with representative offices in Hong Kong and Mexico City.

Apart from the Bank of England and the BIS, where are the other major federal gold vaults and what kind of security do they offer?

Top of the list comes the Fort Knox Bullion Depository at Fort Knox in Kentucky, the US. The facility is protected by multiple layers of security, including a solid granite perimeter, 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.

Then there is the Deutsche Bundesbank in Frankfurt, Germany. Security includes advanced electronic surveillance, strict access controls, and coordination with local and federal security agencies.

The Banque de France in Paris, France, is another major federal gold vault. The Banque de France employs sophisticated security measures, including high-security vaults, surveillance systems, and armed guards.

In Switzerland, 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.

Now, coming back to India, New Delhi’s decision to store a portion of its gold reserves in foreign vaults is underpinned by a multifaceted approach aimed at mitigating risks, ensuring liquidity, advancing economic interests, and bolstering security. By strategically diversifying the geographic locations of its gold holdings, India not only fortifies the safeguarding and accessibility of these critical assets but also reinforces its standing within the international financial landscape.

This prudent strategy empowers India to leverage its gold reserves adeptly, fostering economic resilience and facilitating sustainable growth objectives. The practice of storing gold reserves abroad serves as a cornerstone for maintaining financial stability while simultaneously positioning India as a formidable player on the global economic stage.