RBI Sells Large Portion of Gold Reserves Amid Pressure on Indian Rupee: Bloomberg Economics

Reserve Bank of India Offloads Gold Reserves Amid Middle East Tensions

The Reserve Bank of India (RBI) may have sold a significant portion of its gold reserves in an effort to shield its foreign-currency assets from the cascading fallout of the war in the Middle East, according to an analysis by Bloomberg Economics.

Gold Sales and Foreign-Currency Purchases

Between May 8 and May 22, the RBI is believed to have sold gold reserves worth roughly $12 billion, while purchasing $7.5 billion of foreign-currency assets. This suggests that the RBI was selling gold to bolster its foreign-currency reserves, despite a hike in import duties on the precious metal, which should have boosted the value of the bank's bullion and dollars.

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RBI's Concerns Over Capital Outflows

The RBI's actions underscore policymakers' concerns about the pressure India is facing from sustained capital outflows and higher oil prices as the Iran war and effective closure of the Strait of Hormuz drag on. The RBI is prioritizing reserves of liquid foreign currency as a wider current-account deficit weighs on the rupee.

Rupee's Performance

The RBI's interventions in the foreign exchange markets have had some effect, helping the rupee outperform most peers in Asia since May 20, when the currency fell to an all-time low. The rupee was down 0.2% to 95.17 on Tuesday.

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Oil Import Bill

As the world's third-largest oil importer, India is burning through foreign currency as the Middle East war inflates its energy bill and batters the local currency.

Government's Efforts to Curb Outflows

The government has ramped up efforts to curb foreign outflows and cushion its economy from the fallout of the war, including hiking fuel prices, and more than doubling import duties on precious metals. Authorities are expected to unveil further measures to shore up the rupee as soon as this week.

RBI's Future Plans

The RBI will likely continue rebuilding forex reserves wherever conditions allow, according to Bloomberg's senior India economist, Abhishek Gupta. "Periods of dollar weakness, renewed foreign-capital inflows, or lower oil prices would create opportunities to add to foreign-currency assets," he wrote.

RBI's Gold Holdings

By the end of March, the central bank held 880.52 metric tons of gold, of which 77% was held domestically. 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.

RBI's Priorities

The RBI's actions reflect its priorities in maintaining a stable currency and managing its foreign-exchange reserves in the face of external pressures. The RBI is weighing all options available to stabilize the rupee, including an interest-rate hike and raising dollars from investors overseas, Bloomberg News reported earlier.