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:
  • 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.
  • 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).
  • 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!
512 sats \ 4 replies \ @kepford 8 Aug
I'm no where near being an economist. At best like many of you I'm a hobbyist. Still, I wanna put this out there.
That said I do think there is a LOT of confusion about what a "gold standard" is and how to define it. My low IQ answer is that a paper money is pegged to a fixed amount of gold. The fact that a fiat currency is "backed by gold" isn't really a "gold standard". If you think about the phrase this makes sense.
  • Standard is a measure of comparison
  • Gold is a commodity that can be measured and therefore used as a ruler
When the US was on a "gold standard" one could take a note and exchange it for gold. This is what was meant by being "backed in gold". In essence paper money was just a receipt for actual gold.
I think what you are describing in the rupee is that the treasury holds a variety of assets. A small portion of that is gold. It is my understanding that most if not all central banks do hold gold along with other assets.
I think Saifedean Ammous gets a lot of criticism for his ego but his books on bitcoin and fiat are well worth reading to get a better understanding of the fiat system, how it compares to bitcoin, and why it hasn't fallen yet. Saying fiat sucks gets a lot of zaps. Honestly, most of the time it doesn't bother me at all because I agree but there are plenty of new/young bitcoiners who seem pretty clueless about economics and fiat.
There is this misconception that fiat currencies like the dollar and rupee aren't backed by anything. That isn't true and if you think about it, if it were true bitcoin would never win. If fiat was truly not backed by anything how does it work? While fiat currencies are inflated and can't really be audited they aren't backed by nothing. I one sense the dollar is backed by our children. Tax cattle as some say. Its also backed by gold. A lot of gold. We do not know how much but my guess is its a massive stockpile. The issue is that the dollar float free of any tether like the market price of gold or bitcoin. Fiat means by decree after all.
I've been a big Ron Paul fan for years and his failure to get even an audit of the Federal Reserve should be instructive. There is a near zero chance we will ever see a gold standard ever again in any country. I do not believe the BRICS will have a truly gold standard currency. Not gonna happen.
Our only hope for sound money is bitcoin. Something that can't be faked and can be audited by anyone with computer.
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Amateur or not, that was very well said.
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Thanks
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Agreed. The only true gold standard is a price peg and guaranteed convertibility both ways.
Just holding gold as an asset means very little.
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I think he wants to suggest that Indians have Individual stockpiles of Gold to back their future!
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That was great.
I remember there being a very controversial monetary reform a few years ago. My grad school friends were worried about being able to use their cash, because they weren't in country to turn it in to the government.
Can you refresh my memory about what that was?
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How do people feel about that, now that it's been a few years?
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People never felt bad about it and now they even feel bad about it. It was managed so well that within a month everything went normal.
Only corrupt people and politicians criticised and felt it was not a good move.
Surprisingly, it was the first ever Demonetization after India's independence in 1947. Much required. Wasn't it?
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Yeah, I didn't hear much about it after the initial irritation.
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Gold-standard is full of limitations, especially in this age and time.
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Yes, I agree. I also want that India should adopt Bitcoin before the world adopts it. But government and people both have not figured it out yet.
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When the USD loses its reserve status, every other fiat has already collapsed. The Rupee, and every other fiat, has the same currency risk as USD in addition to its own country risk. It is simply another layer “backed” by dollars.
TLDR: if you must hold fiat, USD is the only logical choice…there is only additional risk holding any other countries fiat.
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meh, not true, exporting countries' currencies will be ok.. Your nym is ironic!
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So the JPY is OK?
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Yes, as long as their government can handle paying their interest rate and can attract the funding they might need with that fake interest rate... Same as the rest.
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Interesting, and you may be right, I just don’t have the level of understanding to know why. Not that it matters! Tick-tock….
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The thing is that Indians don't save too much in INR. Those who can save, they generally save in Gold.
I'm not saying that India's currency wouldn't fall. It would fall but Indians would be least impacted as they have their own Gold reserves.
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Until other people, then the government, figure that out. Like all physical property, it’s only as safe as the amount of force you have and are willing to use to defend it.
The Mandibles, by Lionel Shriver, is a novel that explores the scenario of a debt default by the United States. The resulting currency collapse and social breakdown. Physical property is one of the first things transferred from the weak to the violent, when things start to unravel.
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reminds me of old bitcoin reddit
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OP is confusing gold standard with Olympic gold medals won by India
India economy is 40% agriculture
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I think you're confused because of your perception about India. Sorry, but here I'm just trying to say that Indian people (including farmers) hold much more Gold just because they are traditionally inclined to hold it. I think, you need to attend an Indian marriage of a middle class or rich family to understand how much Indians love Gold. Also, India wasn't called a 'Golden Bird' for nothing. There's still lot of Gold which people pass generation to generation.
These are numbers for the gold which is on record. If you include unnotified Gold, you would need to double these figures. And, believe it or not it's a reality. In case you don't believe it. Let me tell you a figure.
Suppose every Indian holds only 20 grams of Gold, calculate how much that would be!!
And then read these...
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Is Rupee a fixed rate or floating rate currency?
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Since 1993, India's currency regime is said to be a managed float, a “market determined exchange rate” in the sense that there is a currency market and the exchange rate is not visibly administratively determined.
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A gold standard depends on fixed rates.
Bretton Woods mandated fixed rates. By ending Bretton Woods in 1971, US dollar converted to floating rate (determined by the currency market).
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TFW you realize that "foreign securities" are similarly "backed" by a fractional amount of gold diluted by a massive amount of yet more "foreign securities".
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They can try, but no!
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Did I miss @Undisciplined gold standard post?
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No, we were just chatting in the comments of some other post.
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Was that the post talking about fort knox?
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Yeah, you didn’t miss anything
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Okay, thats good. Any new information pop up?
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Other than this post, no
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Another 💩🪙
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You're right that Indians aave too much in gold. But this doesn't make Indian currency formidable to a weathers. It may still fail and when it fails can we start using Gold jnstead of currency?
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stackers have outlawed this. turn on wild west mode in your /settings to see outlawed content.