Did RBI sell gold to protect India's forex reserves?
What's the story
The Reserve Bank of India (RBI) may have sold a portion of its gold reserves to protect its foreign-currency assets from the impact of the ongoing US-Iran conflict in West Asia. An analysis of publicly available data by Bloomberg Economics suggested that the central bank sold about $12 billion worth of gold and bought $7.5 billion in foreign-currency assets during two weeks ending May 22.
Market response
Decrease in gold reserves amid increased import duties
The reported decrease in the value of RBI's gold reserves comes even after an increase in import duties on the precious metal. Normally, such hikes would increase the value of both bullion and dollars held by the bank. However, this discrepancy indicates that RBI could be offloading its gold holdings to maintain liquidity amid external pressures from capital outflows and rising oil prices due to geopolitical tensions in West Asia.
Strategic shift
Strategic shift by RBI to prioritize liquid foreign currency reserves
The potential gold sales highlight a strategic shift by the RBI to prioritize liquid foreign currency reserves over gold. This comes as a wider current-account deficit puts pressure on the Indian rupee. RBI Governor Sanjay Malhotra is said to be considering all possible measures, including an interest-rate hike and raising dollars from overseas investors, to stabilize the currency.
Market impact
Rupee outperforms most Asian peers since May 20
RBI's interventions in the foreign exchange markets have had some effect, with the rupee outperforming most Asian peers since May 20. However, as the world's third-largest oil importer, India is consuming foreign currency at a rapid pace due to rising energy costs amid the West Asia war. The government has taken steps to curb foreign outflows and mitigate economic fallout from these geopolitical tensions by increasing fuel prices and import duties on precious metals.
Reserve strategy
RBI likely to continue rebuilding forex reserves wherever possible
Going forward, the RBI is likely to continue rebuilding forex reserves wherever possible. Abhishek Gupta, a senior economist at Bloomberg Economics, wrote "Periods of dollar weakness, renewed foreign-capital inflows, or lower oil prices would create opportunities to add to foreign-currency assets." As of March-end, the central bank held 880.52 metric tons of gold with 77% held domestically and most overseas holdings with the Bank of England and Bank for International Settlements.