RBI Reportedly Sold $12 Billion in Gold to Bolster Reserves Amid US-Iran Conflict

According to an assessment by Bloomberg Economics, RBI sold gold worth around $12 billion during the two weeks ending May 22. (AI image)

Amid the ongoing US-Iran conflict, the Reserve Bank of India may have sold some of its gold holdings to protect foreign exchange reserves from the economic fallout of the Middle East situation, according to a report. India, the world's third-largest importer of crude oil, is facing mounting pressure on its foreign exchange resources as the conflict in the Middle East pushes up energy costs and weakens the domestic currency. To limit the impact of these external shocks, the government has stepped up measures aimed at reducing foreign exchange outflows and stabilising the economy. These steps include increases in fuel prices and a sharp rise in import duties on precious metals.

RBI reducing gold holdings?

According to an assessment by Bloomberg Economics based on publicly available data, RBI sold gold worth around $12 billion during the two weeks ending May 22. Abhishek Gupta, Senior India Economist at Bloomberg Economics, estimates that the RBI added approximately $7.5 billion to its foreign currency assets. The decline in gold holdings happened despite an increase in import duties on the metal, a factor that would ordinarily have lifted the value of the RBI’s bullion stock and associated dollar assets. Gupta said this pattern points to possible gold sales by the central bank. If confirmed, the transactions would reflect growing concerns among policymakers about the economic strain arising from persistent capital outflows and elevated crude oil prices linked to the Iran conflict and the disruption of shipping through the Strait of Hormuz. The move would also indicate a preference for maintaining a higher level of readily deployable foreign currency reserves at a time when a widening current account deficit is exerting pressure on the rupee. Also Read | From UK, BIS vaults to Indian shores: Why RBI is bringing more & more gold home According to Abhishek Gupta, the RBI is likely to continue strengthening its foreign exchange reserves whenever market conditions are favourable. Periods marked by a softer dollar, renewed overseas capital inflows or lower crude oil prices could provide opportunities for the central bank to add to its foreign-currency holdings. As of the end of March, the RBI held 880.52 metric tonnes of gold. Around 77% of these reserves were stored within India, compared with 66% six months earlier. The central bank noted in its half-yearly foreign-exchange report released in April that most of its overseas gold holdings are kept with the Bank of England and the Bank for International Settlements. The steady increase in gold repatriation over recent years suggests that the RBI, like several other emerging-market central banks, has become more cautious about keeping a large share of its reserves abroad. Concerns over the safety of overseas-held assets intensified after Western nations froze Russian reserves following the outbreak of the Ukraine conflict.

RBI moves to protect rupee

According to an earlier Bloomberg report, RBI Governor Sanjay Malhotra is evaluating multiple measures to support the currency, including the possibility of raising interest rates and attracting additional dollar inflows from overseas investors. Interventions by the central bank in the foreign exchange market appear to have provided some support to the rupee. Since touching a record low on May 20, the currency has outperformed many of its Asian peers. On Tuesday, however, the rupee was trading 0.2% lower at 95.17 against the US dollar. Market participants expect additional measures to support the rupee to be announced in the near term.

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