Gold Management and RBI: The Global ANALYST

Article published in the October 2018 issue of The Global ANALYST (A Business & Finance Magazine from ICFAI)

Central Bank is Back to Saying “I’m Lovin’ It”

M G Warrier

“As a macroeconomist, I uphold the view that integrating gold with India’s broader economic vision is the touchstone for India’s gold policy and gold markets. The foremost is adopting ‘Make in India’ policy which should address unexplored gold stocks below the ground, optimal use of gold stocks in circulation, and mobilize gold holdings held by individuals in lockers and temples.”
-Errol D’Souza, Director, IIM, Ahmedabad

The caption of this article is just an expression of a pious wish, but the prayers of 99 percent Indians who do not own more than 20 grams of gold per family are behind me, to make it happen. Perhaps India may be alone in the world to sustain the dubious distinction of grossly mismanaging an asset (read gold) the country has been holding for centuries in huge quantities, in multiple forms, and in various places. When the population starved and died as a consequence of bad governance or as victims of nature’s wrath, Indian rulers allowed use of huge quantities of gold (a) to be wasted for gold-plating of roofs, flag-masts, and statues and (b) to be held in underground vaults, hidden and unaccounted, as unproductive ‘assets’.

RBI’s gold holdings

It has to be said to the credit of those who drafted Reserve Bank of India Act, 1934 which came into effect on April 1, 1935, that the framers of the Act included appropriate provisions in the Act to give the respect it deserved, to the yellow metal. Original Act provisions mandated RBI to ensure that 40 percent of the value of currency issued was backed by gold bullion and sterling reserves. Of course, with the higher level of trust of people in the central bank emerging, this was reduced and from 1956, RBI follows Minimum Reserve System(MRS). Under MRS, the central bank has to keep a minimum reserve of Rs200 crore comprising of gold coin and gold bullion and foreign currencies. Out of the Rs200 crore, Rs115 crore should be in the form of gold coin and gold bullion. Public trust in RBI is reinforced by a strong Balance Sheet maintained by the Reserve Bank of India.
When India faced a near crisis in meeting international payment obligations in 1991, it was the gold-holdings in the RBI’s vault that came to the country’s rescue. In January 1991, as India struggled to finance its essential imports, especially of oil and fertilizers, and to repay official debt,  the Chandra Shekhar government knocked at different doors in the global financial system, which India considered friendly, for forex support.. India actually managed to get a bit of a breather with the first tranche of $755 million from the IMF, but that was too little.
By mid-March 1991,  global credit-rating agencies placed India on watch and by April, downgraded the country’s sovereign rating from investment grade to a notch lower, making it virtually impossible to raise even short-term funds.
When all efforts to raise funds got stuck up with hurdles, some central banks and investment banks abroad,  pointed to the fact that India had enough gold which could be utilized.
Between July 4 and 18, 1991, the RBI pledged 46.91 tonnes of gold with the Bank of England and the Bank of Japan to raise $400 million. But as the economic situation improved, the government repurchased the gold before December the same year and transferred it to the RBI.
Memories, sometimes haunt us, at wrong occasions. Post-1947, UK and US and world bodies controlled by them and their allies were very friendly with India when they felt that we are able to manage our affairs on our own and kept a safe distance when we needed them most.
Hopefully, the time when other central banks and international bodies will be keeping their gold in the vaults of Reserve Bank of India is not far off. That day, we will again remember 1991 with a smile.
After a long gap, RBI has added 208 tonnes of gold to the reserves during the last nine years. RBI purchased 200 tonnes of gold from the International Monetary Fund (IMF), under the IMF’s limited gold sales programme in 2009.
“This was done as part of the Reserve Bank’s foreign exchange reserves management operations. The purchase was an official sector off-market transaction and was executed over a two week period during October 19-30, 2009 at market-based prices,” the central bank announced on November 3, 2009. Again, after a gap of almost a decade, during 2017-18, RBI has added 8.46 metric tonnes of gold to the country’s gold reserves taking the gold component in foreign exchange reserves to 566.23 metric tonnes. Even at this level, the gold component in the central bank’s foreign exchange reserves constitutes only 6.3 percent. The US has the highest percentage of gold reserves with Fed Reserves at 74.9. See Table 1.
In the recent past, GOI and RBI have taken several measures to restore the respectable position of the yellow metal, much beyond its decorative worth.

Table 1

World’s top 10 central banks having a substantial gold component in their foreign exchange reserves (2017)
Serial No
Gold Reserves
As % to Forex Reserves

After independence, India continued to spend huge amounts of precious foreign exchange to procure gold for meeting the ever-increasing demand from the domestic jewelry industry. 
Errol D’Souza, Director, IIM, Ahmedabad in his note recorded in the 3rd Annual Report (2017-18) of the India Gold Policy Centre had this to say about gold management in India:
“As a macroeconomist, I uphold the view that integrating gold with India’s broader economic vision is the touchstone for India’s gold policy and gold markets. The foremost is adopting ‘Make in India’ policy which should address unexplored gold stocks below the ground, optimal use of gold stocks in circulation, and mobilize gold holdings held by individuals in lockers and temples.”

Long back, someone had stated that India is a rich country with poor people. That person was not talking about the ‘hidden wealth’ in this country. In reality, the unaccounted wealth (for the time being the reference is not to tax evasion) in the custody of individuals and organizations in the form of gold, jewelry, and real estate, waiting to be mapped and mainstreamed must be worth trillions of rupees. If we are able to create a national consensus and build public trust to mainstream and pool a part of such domestic assets, India’s dependence on external sources for our immediate development needs will come down drastically. This will be a challenge worth chasing.
It is not comforting to see ‘fund mobilization drives’ to help flood victims in Kerala at the instance of governments abroad being organized to provide financial support to India when our own wealth idle in vaults here. Fortunately, responding to media reports about an offer of ‘aid’ from a friendly kingdom (UAE), GOI was quick in advising Government of Kerala to politely decline such direct offers from foreign governments simultaneously clarifying that there was no ban on receiving contributions for relief and rehabilitation work from individuals and organizations of NRIs abroad.
The excerpts in Box 1 are from a media report (Source: The Hindu Website) about the Temple Treasure in Padmanabhaswamy Temple, Thiruvananthapuram.

Box 1
Temple Treasure in Padmanabhaswamy Temple, Thiruvananthapuram

Inventory of the treasure[edit]

The Supreme Court of India had ordered an amicus curiae appointed by it to prepare an inventory of the treasure. Full details of the inventory have not been revealed. However, newspaper reports gave an indication of some of the possible contents of the vaults.[4] About 40 groups of objects were retrieved from Vault E and Vault F. Another 1469 groups of objects found in Vault C and 617 in Vault D. Over 1.02 lakh (102,000) groups of objects (referred to as articles collectively) were recovered from Vault A alone.
According to confirmed news reports, some of the items found include:-
·         A 4-foot (1.2 m) high and 3-foot (0.91 m) wide solid pure-golden idol of Mahavishnu studded with diamonds and other fully precious stones.[7]
·         A solid pure-golden throne, studded with hundreds of diamonds and precious stones, meant for the 18-foot (5.5 m) idol of the deity
·         Ceremonial attire for adorning the deity in the form of 16-part gold anki weighing almost 30 kilograms (66 lb)
·         An 18-foot (5.5 m) long pure-gold chain among thousands of pure-gold chains
·         A pure-gold sheaf weighing 500 kilograms (1,100 lb)
·         A 36-kilogram (79 lb) golden veil
·         1200 'Sarappalli' pure-gold coin-chains encrusted with precious stones weighing between 3.5 kg and 10.5 kg
·         Several sacks filled with golden artifacts, necklaces, diadems, diamonds, rubies, sapphires, emeralds, gemstones, and objects made of other precious metals
·         Gold coconut shells studded with rubies and emeralds
·         Several 18th-century Napoleonic-era coins
·         Hundreds of thousands of gold coins of the Roman Empire
·         An 800-kilogram (1,800 lb) hoard of gold coins dating to around 200 BC [8]
·         According to varying reports, at least three if not many more, solid gold crowns all studded with diamonds and other precious stones
·         Hundreds of pure gold chairs
·         Thousands of gold pots
·         A 600-kg cache of gold coins from the medieval period
While the above list is on the basis of reports describing the July 2011 opening (and later) of Vaults A, C, D, E and F, a 1930s report from The Hindu mentions a granary-sized structure (within either of vaults C or D or E or F but not Vault A) almost filled with mostly gold and some silver coins.A. Srivathsan (June 6, 2013). "When the vault was opened in 1931". The Hindu. Retrieved 27 November 2015.
Future course
I would like to conclude this article by repeating a slightly modified version of the concluding paragraphs of my own article in this magazine on the same subject written some 3 years back:
Reserve Bank of India should counsel GOI to understand the significance of the treasure in the form of gold stock with institutions and individuals lying idle in the country. As a short-term plan, concrete measures should be initiated for putting at least some 20 percent of the domestic gold stock to productive use in the next 5 years. This will reduce the country’s gold import bill considerably. This can be achieved by:
·         Making a realistic assessment of gold stock remaining idle in the country
·         Providing incentives to holders of gold stock to properly account for the stock with them
·         Making gold deposits with banks remunerative
·  Introducing gold-backed financial instruments which are not dependent on imported gold (The tiny instruments now available in the form of Gold ETFs, gold coins and Sovereign Gold Bonds are indirectly dependent on import and have not attracted significant investor-interest)
·  Quickly arrange for infrastructure, technology support and linkages for gold refining and certification facilities of international standard
·  RBI and GOI could consider even deficit financing for the procurement of domestic gold as this could herald the emergence of a ‘Golden Era’ in the country’s history.
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(*Submitted version. M G Warrier is a former central banker and author of 2018 book “India’s Decade of Reforms”. His email ID


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