Extracts from Chapter 4: The Crisis Years 1990-92 from former RBI Governor C Rangarajan’s book, Forks in the road: My days at RBI and Beyond, published by Penguin Random House

Even as we were exploring different possibilities for raising resources, one issue that came up was related to the use of the gold RBI had as part of the reserves. It may be recalled that in August 1990, Governor Malhotra had suggested keeping 15 per cent of gold reserves abroad so that it could be utilized at a time of emergency. We supported exploring this possibility. In fact, this was also a hint given by fund managers and international banks with whom we were negotiating.

Several steps were being taken to activate the RBI’s gold holdings. The first step was to revalue the gold holdings at market price. This was done by the government through an ordinance in October 1990, which was later approved by Parliament to become part of the Reserve Bank of India (Amendment Act), 1991. In January 1991, a proposal was mooted by the State Bank of India (SBI) to raise foreign exchange through the lease of gold held by the government. In April 1991, the government agreed to the proposal to pledge 20 tonnes of confiscated gold to raise a foreign exchange loan by SBI and gold was dispatched in four consignments in May 1991. This was actually executed in the form of sale with a repurchase option. RBI was involved totally in this arrangement.

This was not enough. But the major issue was the use of gold held by RBI. In using RBI’s gold, there were three sets of issues to be faced and cleared. First, at the policy level, a decision was needed. Given the sentimental attachment to gold, it was felt from the beginning that outright sale of gold was not thought of as an option.

Pledging gold and raising a foreign exchange loan was the only thing contemplated. Second, whatever was to be done had to be consistent with the provisions of the RBI Act. Under the Act, RBI could borrow only from other currency authorities. The maturity of the loan had to be only for a month. Third, there were issues connected with the physical task of selecting, packing and sending gold out. It bristled with many problems.

The initiative to pledge gold was taken by RBI. It, of course, needed the permission of the government, which was given. It was a bold decision by a government which at that time was only a caretaker government led by Chandra Shekhar. It showed great wisdom and courage. That was the starting point.

Willing Central banks

Under the RBI Act, RBI can borrow only from a ‘currency authority’, which is the Central Bank of a country. BIS had to be ruled out because it was not strictly a currency authority. It turned out that Bank of England and Bank of Japan were two central banks who would be willing. But both the institutions insisted that the pledged gold must be kept outside India, despite India being a depository country under IMF.

As mentioned earlier, the RBI Act does permit keeping of gold outside India, but with some restrictions. There was also another problem. To conform to the provisions of the Act with respect to borrowing, RBI had to transfer the asset from the issue department to the banking department and this was done before trans-shipping the gold. Since RBI is permitted to borrow only for a month, the borrowing had to be rolled over from month to month. The third set of issues relating to the shipment of gold turned out to be more arduous than expected. The gold stock of RBI was kept in two places. Since the quantity of gold to be pledged was around 50 tonnes, it was decided to use only the gold that was in stock in Mumbai.

Transporting gold from any other place to Mumbai would have been another huge task. However, there was another serious problem. The gold that was in stock was in various forms. Not all of them satisfied London Good Delivery (LGD) specifications in terms of fineness, weight and marks. It was decided to send the pure gold bars as they were and Bank of England was entrusted with the responsibility of converting non-LGD bars into LGD bars. The departments concerned had to weigh a sizeable number of bars to complete the job. Packing, insuring and finally sending the gold through the airlines had to be done in a short span of time without attracting much attention.

This was an operation in which various departments of RBI such as External Investments and Operations (DEIO), Issue, Banking Operations and Legal had to come together and act. PB Kulkarni, chief of DEIO, and his band of devoted colleagues did a tremendous job. In all, 46.91 tonnes of gold were dispatched in four consignments by air beginning 4 July. The largest consignment was the second one, which had to be transported through a chartered carrier. It is interesting to note that the actual dispatch happened after the new government of Narasimha Rao and Manmohan Singh had taken over. The new finance minister raised no objection and he, in fact, defended the action in the Parliament

High drama

The entire episode is not without its drama. For example, when any commodity is sent out of the country, the nature of the commodity has to be declared. I spoke with the commissioner of customs and a special authorization from the finance ministry had to be obtained to send gold without such a declaration. I also remember that as one of the consignments had an intermediate stopover, a sudden doubt arose whether this was covered by insurance. On a Sunday, I had the office opened to check the policy and was relieved to find that it was a ‘Vault to Vault’ insurance cover.

Finally, one other incident. When gold was moved from the vault of the Bombay office to the airport, the movement along the road was closely monitored. It so happened in the case of one large consignment, the bullion van had to stop because of a suspected tyre burst of one of the cars in the convoy. 

Fortunately, before much commotion could happen, the convoy resumed its journey. The total loan raised against the pledge of gold was US $405 million. In today’s reckoning it may look small. It is not even equal to what we get sometimes in the form of capital flows on a single day. But that amount was crucial at that time to prevent a default. There was no intention on the part of RBI or the government to hide the transaction from the public. RBI wanted to make it public once the operation was over. Otherwise, there was some operational risk.

The shipment of gold brought out loud and clear the extremely critical situation in which India was placed. It also brought home to everyone the enormity of the crisis. In a sense, it paved the way for the reforms that were to come.

( Extract published with permission from Penguin Random House)

Forks in the Road: My days at RBI and Beyond
Publisher: Penguin Business
Price: ₹699  

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