While having a very intriguing conversation with @Undisciplined on the topic of 'gold being bought by governments'. Our conversation just caught me off guard when I mentioned that India still follows 'A Gold Standard'. I made this comment knowing 'A Gold Standard' is still theoretically right for India but is it the same that we had till 1971 when the United States unilaterally terminated convertibility of the US dollar to gold, effectively ending the Bretton Woods system?
Assuming that it's a matter of comprehensive nature, I requested @Undisciplined to give me some time to come up with a post about this. To understand whether India still follows 'The Gold Standard', we first need to understand what the law says in this regard.
All banknotes issued by RBI are backed by assets such as gold, Government Securities and Foreign Currency Assets, as defined in Section 33 of RBI Act, 1934.
Section 33 of RBI Act, 1934 prescribes the following:
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The assets of the Issue Department shall consist of gold coin, gold bullion, 7 [foreign securities], rupee coin and rupee securities to such aggregate amount as is not less than the total of the liabilities of the Issue Department.
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The aggregate value of the gold coin, gold bullion and foreign securities held as assets and the aggregate value of the gold coin and gold bullion so held shall not at any time be less than two hundred crores of rupees and one hundred and fifteen crores of rupees, respectively. (Minimum 200 crore of gold and foreign securities of which gold should not be less than of worth 115 crore).
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The remainder of the assets shall be held in rupee coin, Government of India rupee securities of any maturity, promissory notes drawn by the National Bank for any loans.
To conclude this law 'Indian rupee is backed by gold but to a limited extent.'
Source :
The Indian rupee is backed mainly by Foreign Currency ( 95.5%) and some Gold ( 4.5%).
RBI or the Govt of India does not promise to back the INR with Gold. RBI holds around 558 tonnes of Gold ( 2018) . The valuation of this Gold changes from time to time depending on the market price of Gold. This is held in Nagpur, but a part of this is also held in London which was the Gold returned to India after Chandrashekhar Government had to transfer the 47 tonnes of Gold to London as a collateral for a $405 million loan in Foreign Exchange.
As far as I know, Gold backing needs 50 % gold in value as compared to the notes printed by the government. While the currency in circulation is itself around ₹ 22 trn for india. While this itself will require some 8000 tons of gold to back it. India has hardly a thousand tonnes of gold. Or equivalent of 6%. As the gold reserves India are just very small and the currency remains floating, the currency value is no way connected to gold reserves today.
The currency value is rarely an indicator of the gold reserves. The most indebted country in the world is USA with a very large proportion of debt as external debt.
But it's currency is so called world currency. It may loose that status in future. It's gold reserves are not even 5 % of the external debt at current price of gold. Still so many countries hold USD as a reserve as against gold.
This is Important:
But one thing can't be ignored that Indians have a very large holdings of gold as compared to their central bank, RBI. Many mandirs (Temples) in India are far richer than RBI in terms of gold. While Indians swallow as much as 800 tons of gold per year, excluding the jwellery exports. So, I would hold that Indians will be least affected if the global currency crashes or is changed to some gold backed currency.
And this is Indian Currency is practically backed by Gold not by any Foreign Currencies such as USD.
What do you say?
Does India hold an edge for people hold a lot of Gold?
Can INR be considered to be backed by Indians as they generally buy a lot of Gold with their savings?
I would mainly love to listen to the views of everyone on the last paragraph of this post.
Thanks for reading!