RBI Likely Sells $12 Billion Gold Reserves to Defend Rupee Amid Middle East War

Top Summary

• What happened: The Reserve Bank of India (RBI) reportedly sold $12 billion of its gold reserves and bought $7.5 billion in foreign currency assets over two weeks.
• Why it matters: Sustained capital outflows and rising energy costs from the Iran war and the closure of the Strait of Hormuz have severely pressured the rupee.
• What changes: Local precious metal prices are set to rise due to higher import duties, while silver ETF premiums may spike due to import restrictions.
• Who is affected: Indian consumers, precious metal investors, bullion traders, jewelers, and local artisans.

RBI's Massive Gold Offload to Protect Forex

According to a new analysis by Abhishek Gupta, senior India economist at Bloomberg Economics, the central bank likely offloaded a substantial portion of its gold holdings during the two weeks ending May 22.

This massive sale occurred despite a recent hike in import duties, which theoretically should have boosted the value of the RBI's bullion and dollar holdings. The central bank is prioritized to maintain liquid foreign currency reserves as a widening current-account deficit drags down the national currency.

As of March, the RBI held 880.52 tonnes of gold, with 77% stored domestically and the remaining held overseas at the Bank of England and the Bank for International Settlements.

Geopolitical Strains and the Rupee's Slide

As the world's third-largest oil importer, India is burning through foreign currency due to rising energy costs. The geopolitical fallout from the Iran war has driven up crude prices, weakening the rupee significantly.

The Indian rupee plunged to a historic low of 96.923 per U.S. dollar on May 20, bumping against the 97 level before recovering slightly. RBI Governor Sanjay Malhotra is actively weighing options to stabilize the currency, including raising dollars from overseas investors and implementing interest-rate hikes.

While central bank interventions have helped the rupee outperform its Asian peers recently, authorities are expected to introduce further stabilizing measures very soon.

Import Duty Hikes Spark Pricing and ETF Concerns

Recent policy changes aimed at preserving national reserves have triggered volatility across India's metal and currency markets. Mariya Paliwala, Senior Editor at Juris Hour, reported that while import duties experienced a net 9% increase, retail prices initially only rose by 5% to 6%.

This delayed price transmission is due to ample existing inventories purchased at older rates and a temporary hesitation from consumers to absorb sudden price hikes. However, once lower-cost stocks are depleted, domestic gold and silver prices are expected to reflect the full impact of the duties.

Additionally, restrictions on silver imports are creating fears of supply channel bottlenecks. This mismatch could widen Exchange-Traded Fund (ETF) premiums beyond normal levels if speculative buying or investor panic occurs.

A Push to Monetize 1,000 Tons of Temple Gold

To mitigate import pressures and protect local jobs, the India Bullion and Jewellers Association (IBJA) has proposed a structured monetization scheme for idle domestic gold stocks.

The IBJA estimates that local temple trusts currently hold nearly 1,000 tons of idle gold. Utilizing this gold would keep the precious metal in circulation within the formal economy without permanently shifting ownership to the government.

"Gold is the second-largest contributor to foreign exchange outflow from the country... If even a portion of that gold can be utilized, it would help significantly."
— Nainesh Pachchigar, IBJA Gujarat State President

In alignment with government objectives to curb speculation, the IBJA has also issued an advisory urging jewelers to stop bullion trading activities and limit individual bullion sales to a maximum of five grams.

What to Watch Next

Market participants will closely monitor whether the RBI proceeds with interest rate hikes or overseas dollar fundraising to support the rupee. Investors will also look to international developments, including policy decisions by the US Federal Reserve, global oil price fluctuations, and the potential resolution of the Iran conflict to determine the medium-term direction of precious metal prices.