Daily Current Affairs-UPSC – 1 June 2024 : RBI brought 100 Tonnes Gold from UK:

Why in News? In a first since early 1991, over 100 tonnes (1 lakh kilograms) of gold have been moved by the Reserve Bank of India (RBI) from the UK to its vaults in India.

As per the report , a similar quantity of gold may head into the country in coming days.

How RBI’s gold reached UK?

• More than half of the RBI’s gold reserves are held overseas in secure custody with the Bank of England and the Bank of International Settlements. Approximately a third is stored domestically.
• According to the latest annual data, as on March 31, 2024, RBI had 822.1 tonnes of gold, up from 794.63 tonnes held during the same period last year.
• Of the total 822.1 tonnes of gold that central bank had in March 2024 end, 8 tonnes was overseas.

Why RBI chose Bank of England?

• Bank of England has traditionally been the storehouse for most number of central banks. For India it is no different as some stocks of the country’s yellow metal is lying in London from pre-Independence days.

How RBI shifted its gold from UK to its vault?

• Getting gold back to RBI’s vault was an extensive logistical exercise.
• It began with months of planning, followed by precise execution and close coordination between the finance ministry, RBI and several other departments of government as well as local authorities.
• The RBI had to get a customs duty exemption to ship the precious metal into India with the Centre “foregoing revenue” on what is a sovereign asset.
• However, there was no exemption from integrated GST (goods and services tax), which is levied on imports, as the tax is shared with the states.
• Also, a special aircraft was used to bring back the bulk quantity of gold with adequate security arrangements put in place.

Why shifting gold from UK helps RBI?

• Shifting gold to its own vault will help RBI save storage costs that it pays to the Bank of England.
• RBI started purchasing gold a few years ago and decided to undertake a review of where it wants to store it, something that is done from time to time.
• Since stock was building up overseas, it was decided to get some of the gold to India.

Where will the gold be stored now?

• RBI keeps the gold is in vaults in its old office building on Mumbai’s Mint Road as well as Nagpur.

Why RBI moved gold from UK in 1991?

• In 1991, the then Indian government-led by prime minister Chandra Shekhar was facing a severe balance of payments crisis after which it pledged to raise funds.
• Between July 4 and 18, 1991, the RBI pledged 46.91 tonnes of gold with the Bank of England and the Bank of Japan, securing $400 million.
• Around 15 years ago, the central bank purchased 200 tonnes of gold from the International Monetary Fund (IMF) under the United Progressive Alliance (UPA) government led by Prime Minister Manmohan Singh, diversifying its assets with a $6.7 billion investment.
• The RBI in the recent years has been persistently building up its gold reserves.
• The strategy behind holding gold is primarily to diversify RBI’s foreign currency assets, hedging against inflation, and mitigating foreign currency risks.
• Since the December of 2017, the RBI has been regularly acquiring gold from the market. As a result, the share of the metal in India’s total foreign exchange reserves increased from 75 per cent at December 2023 end to about 8.7 per cent by April 2024 end.

India’s position in Gold Reserves:

• The country holds the 9th position in global rankings, according to the World Gold Council (WGC).

Gold’s Share in Forex Reserves:

• The country’s forex reserves were $646 billion, a growth of 11.6% on year.
• The share of gold in India’s total foreign exchange reserves rose to 15% or $52.2 billion in FY24 Impact of Gold on the Economy

Impacts on Indian Economy:

Business/employment opportunities:

• Gold is used as a raw material for jewellery fabrication and making coins. This in turn creates business opportunities, value addition and employment.
• The industry provides employment to a significant number of people in India, including miners, artisans, and retailers.

Current account deficit (CAD):

• India is the world’s second-largest importer of gold, which contributes to the country’s current account deficit.
• The import of gold requires foreign currency, which puts pressure on the country’s foreign exchange reserves.
• It should be noted that the gold imports are also used for export of gold jewellery, it has the potential to mitigate the adverse impact of imports on CAD.

Inflation: 

• Gold is often used as a hedge against inflation, which means that during times of high inflation, demand for gold increases.
• This can lead to an increase in the price of gold, which can contribute to inflation.

Savings and investments:

• Gold is considered a safe-haven asset and a store of value in India, which means that many people use it as a means of savings and investment.

Financialization of Gold

• A report by NITI Aayog estimated that around 23,000-24,000 tons of gold lies unused with the households and religious institutions throughout the nation.
• It is with the view to monetise this unutilized gold that the Government introduced the Gold

Monetisation Scheme (GMS) in the Union Budget, 2015.

• The gold accumulated under the GMS was to be used productively and profitably, by banks through the Gold (Metal) Loan (GML).
• GML was introduced as a low interest rate financial product for meeting inventory financing needs of the borrower.

• The Government had launched the Sovereign Gold Bonds Scheme (SGBS) on November 5, 2015.

• The main objectives of this scheme were to reduce the demand for physical gold and shift a part of the gold imported every year for investment purpose into financial savings

What is Sovereign Asset?

• A sovereign asset is a valuable resource owned or controlled by a national government. It encompasses a range of holdings that contribute to a nation’s financial well-being and stability.
• Foreign Exchange Reserves: This is a pool of currencies held by the central bank to manage exchange rates, maintain financial stability, and conduct international transactions. It often includes major currencies like US dollars, Euros, and Yen.
• Sovereign Wealth Funds (SWFs): These are state-owned investment funds that invest excess revenue from a country’s resources (oil, gas) or budgetary surpluses. They aim to generate long-term returns for the nation and can invest in stocks, bonds, real estate, and other assets.
• Strategic Reserves: These are stockpiles of essential goods held by the government for emergencies or national security purposes. Examples include food reserves, medical supplies, or fuel.
• Public Pension Funds: These funds hold assets to finance future pension payments for government employees or citizens.
• Natural Resources: A nation’s natural resources like oil, minerals, or precious metals can also be considered sovereign assets, especially if the government has significant control over their extraction and sale.