Gold Reserves, What and Why?

Today we will dive into the safety net of many economies, the ‘Gold Reserves’. We will specifically look at it from an India first perspective and explore all the factors and outcomes of possessing a gold reserve.

I called gold reserves a savior, specifically a reliable one. Let me explain this through a certain scenario which is related to the current situation India is in (as of May 6th, 2025). In the hypothetical war situation where India and it’s neighboring country take up arms, foreign investors will pull their money out of the Indian markets. Many countries may impose sanctions for participating in a war. This may lead to a dip in the value of the INR (Indian Rupee). Rupee losing it’s value will make it difficult for the government to carry out their trades as usual. This increases the importance of Gold. Gold can be used in emergency transactions where the seller wont accept payment in rupees and we have to use a common currency acceptable to both parties.

In short, gold provides resilience to the economy, backing it when the global pressure starts building up. A few technical figures to pick your brain. Right now Indian Gold reserves are at 879.60 tons which is roughly equivalent to Rs. 7.5 lakh crores in value. (For comparison, that is close to 15% of the total union budget). This has increased from 876.2 tons in fourth quarter of 2024 which is a good sign. U.S.A leads the gold reserves table with around 8133.46 tons followed by Germany, Italy, France, Russia, China and Switzerland. India lies at 9th on this list.

A question thus arises. Where is this gold coming from? The answer is imports. India imports approximately 95% of all the reserves. Switzerland is our largest supplier of gold followed by UAE, South Africa and Peru. India also has a significant mining operation at Hutti, Karnataka, producing close to 1-2 tons of gold per year. RBI also deals with other international and central banks to buy gold.

We tried to answer why we have gold reserves. Lets look at more such scenarios or situations where our reserves will come in handy. Gold reserve is like an insurance policy for our currency. The currency crisis is one scenario which we talked about where the value of rupee depreciates so much that we have to switch to gold as the currency. Example of this was in 1991, when India airlifted 67 tons of gold to the Bank of England to secure a $2.2 billion IMF loan and avoid default. If in any geopolitical tension our currency is blocked or sanctioned, we can still fund essential trades and defense using gold. Gold also retains its value over time, like it did during the COVID-19 pandemic. Therefore its a safe and reliable option for foreign exchange stability. India can also use its gold reserve as a financial leverage or collateral in case it need to borrow money from other banks or governments.

India being in the 9th position in the race of gold reserves, has to speed up and improve the GDP vs Gold holdings ratio. This also comes with a few cons like high import costs, price fluctuations, and storage and security costs. And with such rising geopolitical tensions, the role of gold will keep increasing it’s importance.

If you have understood everything mentioned here, here is a question for you, “If a major war or financial crisis hits, will India’s 800+ tons of gold be enough? Or should RBI aggressively buy more while global trust in the dollar declines?”