India’s Untapped Gold Reserves: It is time for a Gold Bank

India’s financial markets have witnessed remarkable growth, with the country’s stock market capitalization surpassing $5 trillion. However, a parallel yet underutilized financial powerhouse exists—gold. Over the last 25 years, Indian households have invested more than $2 trillion in gold at today’s value, accumulating over 20,000 tonnes. Unlike stock market wealth, this vast reserve remains locked in household lockers, offering no contribution to the formal financial system.

While India has attempted multiple gold monetization initiatives, these programs have failed due to poor financial incentives, lack of liquidity, and insufficient risk protection mechanisms. To truly unlock this wealth, India requires a gold-backed banking and investment framework that ensures financial stability while offering households meaningful incentives to bring their gold into the system.

The Current State of Gold in India: A Dormant Yet Powerful Asset

The Indian jewelry industry holds 500 tonnes of gold as inventory, yet it remains largely insulated from price fluctuations. Nearly half of this inventory is leased, meaning jewelers primarily generate profits through value addition rather than gold price appreciation.

By contrast, the real stakeholders exposed to gold price volatility are:

• The Indian government, which must manage trade balances and foreign reserves.
• The general public, which holds gold as an informal wealth reserve but lacks structured financial benefits.

Despite several government initiatives, gold remains largely outside the formal economy, leading to wasted economic potential and increased reliance on gold imports.

Sovereign Gold Bonds: A Cautionary Tale for Policymakers

The Government of India, through the Reserve Bank of India (RBI), has issued 140 tonnes of Sovereign Gold Bonds (SGBs) over nine years, collecting INR 70,000 crores at an average price of INR 5,000 per gram. However, as gold prices surged to INR 8,500 per gram, the RBI had to repatriate 100 tonnes of gold from London to meet redemption obligations—imposing an unexpected financial burden.

A more alarming risk arises if gold prices fall. If gold drops below $2,000 per ounce and the Indian rupee appreciates to INR 50 per USD, Indian households could suffer a wealth erosion of nearly $1 trillion (INR 80 lakh crores). Despite 15,000 tonnes being acquired at an average cost of INR 4,000 per gram, a structured approach to managing gold price risk is long overdue.

Unlike financial markets, where wealth fluctuations trigger regulatory interventions, gold price risks remain ignored—a glaring policy oversight that must be corrected.

A New Gold-Backed Banking Model: Unlocking Economic Potential

The failure of India’s existing Gold Monetization Schemes (GMS) can be attributed to low financial returns (2.5% annual interest), liquidity constraints, and inadequate risk protection mechanisms. A more effective model should focus on gold-backed banking and investment solutions to fully integrate gold into the financial system.

Key Features of a Gold-Backed Banking Model

1. Comprehensive Risk Management – Price fluctuations are hedged through structured financial instruments, ensuring stability and security for depositors and institutions alike.
2. Gold-Backed Credit Expansion – Indian Good Delivery Standard gold is deposited with RBI, monetizing assets for low-interest credit in housing, education, and infrastructure sectors.
3. Elimination of Asset-Liability Mismatch – Traditional banks struggle with mismatches between short-term deposits and long-term loans. A gold-backed system provides a stable reserve base.
4. Flexible Investment Options – Depositors can contribute either cash (to purchase new gold) or existing household gold, turning idle wealth into productive financial capital.
5. Modern Approach to the Gold Standard – Instead of returning to a rigid gold-backed currency, this model integrates gold into India’s financial architecture under RBI supervision.
6. Attractive Returns & Liquidity – Depositors benefit from:
7. Integration with GIFT City – India’s International Financial Services Centre (IFSC) in GIFT City offers advanced risk management tools that allow banks to hedge gold price risks efficiently while ensuring competitive returns to depositors.

The Economic Impact: A Transformational Shift in Resource Utilization

If just 10% of household gold reserves (2,000 tonnes) are unlocked, it could inject over $170 billion into India’s financial system, creating a seismic economic impact: ? Reduced reliance on gold imports, improving India’s trade balance. ? Enhanced domestic credit availability, fueling economic expansion. ? Strengthened INR stability, mitigating risks of currency depreciation. ? Improved capital market efficiency, transforming gold into a productive financial asset.

Learning from Indonesia: The Urgent Need for Implementation

While India continues debating gold banking, Indonesia has already moved forward with its Bullion Bank, proving that the model is practical and profitable.

For decades, India has been the world’s largest consumer of gold, yet it has failed to utilize this asset productively. Indonesia’s Bullion Bank framework serves as a successful case study, demonstrating how a country can leverage gold reserves to drive economic growth.

Conclusion: The Time to Act Is Now

India’s gold reserves represent a massive untapped financial resource, yet past initiatives have failed due to weak financial incentives, lack of risk management, and structural inefficiencies.

By adopting a modern gold-backed banking model, supported by strong financial incentives, advanced risk management, and seamless integration with capital markets, India can transform its dormant gold reserves into a powerful economic tool. The time for discussions is over—it is time to act.

India must take the bold step forward. Let’s unlock the true potential of gold. ??