The management of gold reserves has been a subject of intense debate and controversy. The Budget 2012-13 has proposed a doubling of customs duty, while the Reserve Bank has expressed its concern about rising imports of gold and other precious metals.

In March 2011, the World Gold Council identified India as a key driver of global gold demand. It made the following observations:

At more than 18,000 tonnes, Indian households hold the largest stock of gold in the world.

Gold purchases in India accounted for 32 per cent of the global total in 2010.

The vast majority of the Indian population (70 per cent) lives in villages, which have traditionally formed the source of more than two-thirds of Indian gold demand.


The WGC research shows that by 2020 cumulative annual demand for gold in India will increase from the present level of 1,000 tonnes to more than 1,200 tonnes, or approximately Rs. 2.5 trillion, at 2011 price levels. Gold is a key factor in forex reserves management and assets of financial institutions. It is held in the form of jewellery, bullion, gold bars or coins by institutions and individuals and so on. The quantity of gold with religious institutions and households in India has never been assessed.

According to one estimate, of the world's exploited stock of 140,000 tonnes of gold, WGC has estimated holdings of gold by Indian households at more than 18,000 tonnes. About 600 tonnes are held with RBI and an unestimated quantity is held by temples and religious institutions.

The Government and RBI decided rather late, or in the last quarter of 2009, to increase the gold component in the country's forex reserves by about 200 tonnes (valued at over Rs 30,000 crore) by way of a purchase from the International Monetary Fund.


While the overall stock position and central bank's holding of gold are not that impressive, our country imports around 800 tonnes of gold annually, which is no mean quantity. The deployment of this precious metal to the advantage of the nation makes for a sorry story.

Gold should be restored its status as a store of value by making it tradable, secure and available in ‘paper' form, against actual stocks of pure and standard gold.

It is high time gold is accorded the position it deserves in forex reserves management. The Centre could also consider an arrangement, through RBI or any other duly constituted authority, to trade in ‘paper gold', against genuine tradable gold stocks. Mutual Fund ETFs are no substitute for this.

In India gold is popular for all wrong reasons. The fascination for this yellow metal as an ornament and as dowry has led to a reluctance among people to talk about gold in public.

From the retail investors' point of view, unfortunately, Gold Exchange Traded Funds (ETFs) are yet to become popular and really tradable. Therefore, the common man is tempted to invest in ornament gold, which has several negatives such as difficulty in ensuring purity, making charges, security-related issues and inadequate liquidity.

The infamous money-lender takes advantage of the helplessness of the common man by luring him with loans against jewellery at high rates of interest. He would offer unimaginably high amounts of loan against each 10 gram of gold, with the ultimate motive of robbing the owner (the pledged gold is sold or forfeited by the money-lender as the loan plus interest grows much beyond the real value of gold pledged in less than a year). This trend, hopefully, has been reversed with the recent RBI directive to follow prudential norms in regard to the loan-to-value ratio.


The time is ripe for authorities to think in terms of dedicated professional institutions at the regional/state level, which will handle gold from a banking angle. An apex body should be equipped with linkages for import and export of gold and gold products with borrowing and lending capabilities.

States like Kerala have successfully intervened in other similar sectors like chits/ kuris and lotteries, which were also areas of exploitation by vested interests. Private players had to fall in line and function with discipline and self-regulation.

Establishment of ‘Gold Corporations' with state participation could also be debated. Such an institution can act as a depository where the gold possession of individuals now in bank lockers and the pledged gold can find a safe shelter, provided the purity can be ensured, and the ‘Corporation' can find the resources and skill to deal in gold and retain the customers' confidence.

(The author is former General Manager, RBI.)