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RBI opposes finance ministry plan to use gold deposits as bank CRR

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Reserve Bank of India has written to the finance ministry opposing a plan to use gold deposits as bank Cash Reserve Ratio (CRR). This can become a hurdle in centre’s plan to monetize gold lying with Indian households.

In support of its move the RBI said banks may hoard excess gold if it is included in CRR and also said the existing rules do not permit usage of gold as bank CRR.

Using gold as CRR will weaken its effectiveness as monetary policy tool and this may expose RBI’s reserves to risk from commodity prices.

CRR reserves are usually used to stabilize the financial system but allowing gold as CRR will expose the central bank’s reserve to commodity risk.

The finance ministry believes that gold available in the Indian financial system should not be unaccounted. Their argument is that if gold is allowed as a part of SLR, it should also be allowed as CRR.

This scheme may not be impactful for retail depositors, but for large institutional holders of gold such as temples and trusts, it will be useful.

The government need to make amendments to both Banking Regulation Acts and RBI Acts to continue with this plan.