The Reserve Bank of India may have sold part of its gold reserves to protect the country’s foreign exchange assets from mounting pressure triggered by the ongoing West Asia conflict, according to a Bloomberg report.
Bloomberg Economics senior India economist Abhishek Gupta estimated that the central bank likely sold nearly $12 billion worth of gold in the two weeks ending May 22, even as it purchased about $7.5 billion in foreign-currency assets.
The report said the decline in gold holdings appeared unusual, particularly after the government raised import duties on the precious metal, a move that should ordinarily have increased the value of the RBI’s bullion and dollar assets. This, he argued, suggests the central bank may have offloaded gold.
The RBI did not immediately respond to Bloomberg’s request for comment.
The possible sale highlights growing concerns within policymaking circles over sustained capital outflows and surging crude oil prices linked to the Iran conflict and the prolonged disruption of shipping through the Strait of Hormuz.
According to Bloomberg Economics, the RBI appears to be prioritising liquid foreign-currency reserves as pressure on the rupee intensifies amid a widening current account deficit.
RBI Governor Sanjay Malhotra is reportedly considering multiple options to stabilise the currency, including a potential interest-rate hike and steps to attract more dollar inflows from investors.
The central bank’s interventions in foreign exchange markets have helped limit losses in the rupee, which has outperformed most Asian peers since touching a record low on May 20. The currency was trading 0.2 per cent lower at 95.17 against the US dollar on Tuesday
India, the world’s third-largest oil importer, has been under pressure as the West Asia crisis drives up energy costs and increases demand for foreign currency.
To cushion the economic fallout, the government has already raised fuel prices and more than doubled import duties on precious metals.
Bloomberg reported that additional measures to support the rupee could be announced as early as this week.
Gupta said the RBI is likely to rebuild its foreign exchange reserves when market conditions become favourable.
“Periods of dollar weakness, renewed foreign-capital inflows, or lower oil prices would create opportunities to add to foreign-currency assets,” he wrote.
By the end of March, the central bank held 880.52 metric tons of gold, of which 77% was held domestically. Six months earlier, it kept 66% of its gold locally.
Most of its overseas holdings are with the Bank of England and the Bank for International Settlements, the RBI said in its half-yearly foreign exchange report in April.
The sharp jump in gold repatriation in recent years indicates the RBI, like other emerging market central banks, has been increasingly concerned about the exposure of its reserves held overseas after Russia’s assets were frozen by the West.