The scheme would probably operate in a similar fashion to that of Turkey’s Reserve Option Mechanism (ROM), which allows commercial banks to hold up to 30 percent of their statutory reserves in gold and foreign currencies.

That scheme, which is widely regarded to have been a success, taps into the large amount of wealth held by Turkish citizens in the form of physical gold, estimated to be more than 2,000 tonnes.

The policy theoretically reduces volatility in the Turkish exchange rate, reduces the impact of foreign currency inflows and reduces the cost of banks meeting reserve requirements. By doing so, it also encourages banks to buy up gold while also allowing private citizens to deposit their gold with banks, which is ultimately transferred to the central bank’s balance sheet.

India Mulls Allowing Commercial Banks To Hold Reserves In Gold