The Reserve Bank of India likely sold $12 billion in gold to shield foreign-currency reserves as Middle East tensions and capital outflows pressure the rupee.
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RBI sold $12 billion in gold to defend forex reserves
The Reserve Bank of India likely sold about $12 billion of its gold reserves in the two weeks through May 22, using the proceeds to buy $7.5 billion of foreign-currency assets as the Iran conflict and rising oil prices battered the rupee, according to an analysis by Bloomberg Economics.
"The fall in gold holdings despite a hike in import duties on the precious metal — which should have boosted the value of the bank's bullion — suggests the RBI was selling gold," said Abhishek Gupta, senior India economist at Bloomberg Economics.
The RBI held 880.52 metric tons of gold as of the end of March, with 77 percent stored domestically, up from 66 percent six months earlier. Most of its overseas holdings are kept with the Bank of England and the Bank for International Settlements, the central bank said in its half-yearly foreign-exchange report in April. The sharp increase in gold repatriation in recent years signals that the RBI, like other emerging-market central banks, has grown cautious about holding reserves abroad after Western nations froze Russian assets following the Ukraine conflict.
The gold sales underscore the pressure India faces as the world's third-largest oil importer. Sustained capital outflows and elevated crude prices from the Middle East war and the effective closure of the Strait of Hormuz have widened the current-account deficit and pushed the rupee to a record low of 95.17 on May 20. The currency traded at 95.17 on Tuesday, down 0.2 percent, though it has outperformed most Asian peers since hitting that low.
Governor Sanjay Malhotra is weighing all options to stabilize the rupee, including an interest-rate hike and raising dollars from overseas investors, Bloomberg News has reported. The government has already hiked fuel prices and more than doubled import duties on precious metals to curb foreign outflows. Authorities are expected to unveil further measures to support the currency as soon as this week.
The RBI will likely rebuild its gold holdings whenever conditions allow, according to Gupta. "Periods of dollar weakness, renewed foreign-capital inflows, or lower oil prices would create opportunities to add to foreign-currency assets," he wrote. The central bank's prioritization of liquid foreign-exchange reserves over gold reflects the immediate challenge of defending the rupee while the Middle East conflict continues to inflate India's energy import bill.
This article is for informational purposes only and does not constitute investment advice.
[1] RBI may have sold gold to save foreign reserves, BE report shows[2] RBI May Have Sold Gold to Save FX Reserves, BE Analysis Shows[3] RBI may have sold $12 billion in gold as Iran war pressures rupee: Bloomberg Economics[4] US-Iran war impact: RBI likely sold $12 billion gold reserves to shield foreign currency assets, says report
