(Image source from: PTI)
Bloomberg Economics reports that the RBI might have sold around 12 billion dollars’ worth of gold reserves to help its foreign exchange assets due to the pressure on the rupee from the conflict in Iran. According to an analysis by Bloomberg Economics, which is based on publicly accessible information, India's Central Bank may have reduced some of its gold holdings to protect its foreign currency assets from the negative effects of the Middle Eastern war. Abhishek Gupta, a senior economist at BE, mentioned that the Reserve Bank of India likely sold about 12 billion dollars in gold during the two weeks ending on May 22, while also purchasing 7.5 billion dollars in foreign currency assets. This decrease occurred even though the import duties on gold increased, which should have enhanced the value of the bank’s gold and dollars. This points to the idea that the RBI was indeed selling gold, according to Gupta. The RBI did not give a quick answer to an email asking for comments. These suggested sales highlight the worries of policymakers regarding the pressure India is under from ongoing capital outflows and rising oil prices due to the Iran conflict and the near closure of the Strait of Hormuz. They also indicate that the RBI is focusing on maintaining liquid foreign currency reserves as a broader current-account deficit affects the rupee.
Governor Sanjay Malhotra is considering all available strategies to stabilize the rupee, which could include increasing interest rates and seeking dollars from foreign investors, as Bloomberg News reported earlier. The RBI’s actions in the foreign exchange markets have had some positive impact, allowing the rupee to perform better than many other Asian currencies since May 20, when it reached its lowest point ever. On Tuesday, the rupee was down 0.2% to 95.17.
As the third-largest importer of oil globally, India is using its foreign currency quickly as the war in the Middle East raises energy costs and weakens its local currency. The government is intensifying its efforts to minimize foreign outflows and protect the economy from the war's impacts, including raising fuel prices and significantly increasing import duties on precious metals. Officials are expected to announce more steps to support the rupee soon. According to Gupta, the RBI will likely keep working on rebuilding its foreign exchange reserves whenever possible. He stated that periods of dollar weakness, renewed foreign capital coming in, or lower oil prices could provide chances to increase foreign currency assets. By the end of March, the central bank possessed 880.52 metric tons of gold, with 77% held in India. Six months earlier, they had 66% of their gold stored domestically. Most of their foreign holdings are with the Bank of England and the Bank for International Settlements, as noted by the RBI in its half-yearly foreign exchange report released in April.
The significant increase in gold repatriation in recent years shows that the RBI, like other central banks in emerging markets, has grown more apprehensive about the risks associated with the reserves it holds overseas following the freezing of Russian assets by Western countries.
