RBI Reportedly Sold About USD 12 Billion in Gold to Shield Foreign-Currency Assets

Context:

According to an analysis by Bloomberg Economics, based on publicly available data, the Reserve Bank of India (RBI) may have sold gold reserves worth roughly USD 12 billion in the two weeks through 22 May, while simultaneously buying about USD 7.5 billion of foreign-currency assets. The move is being read as a deliberate rebalancing of India’s forex reserves, where the central bank is prioritising liquid foreign currency (mainly the US dollar) over gold holdings, at a time when India is facing multiple external pressures, including the Iran-related Middle East war, the effective closure of the Strait of Hormuz, sustained capital outflows, higher oil prices, and a widening current account deficit (CAD) that is pressuring the rupee.

Why this is significant?

(a) Gold prices were stable to firm, so the fall in reported gold value points to actual sales, not just valuation effects.
(b) Import duty on gold had been hiked, which would have increased the rupee value of gold reserves. (c) The direction of change in the data is opposite to what these factors would normally suggest, supporting the interpretation of active selling.

Why the RBI may be doing this?

(a) Pressure on the rupee from capital outflows and higher oil prices.
(b) Widening current account deficit due to costlier energy imports and softer remittance and FDI/FPI inflows.
(c) Need for liquid foreign currency, mainly US dollars, to intervene in the FX market without moving the spot rate too sharply.
(d) Gold, while a strategic reserve, is less immediately liquid than dollar assets in stress periods.

Why hold gold partly overseas?

(a) Operational flexibility during international transactions.
(b) Easier use as collateral for swaps and liquidity operations.
(c) Diversification of custody risk between domestic and global custodians.

Background Concepts (Q&A)

What are India’s “Foreign Exchange Reserves”, and What are They Composed Of?

Foreign Exchange Reserves (often shortened to forex reserves) are external assets held by the central bank of a country to support its currency, balance of payments, monetary policy, and financial stability. India’s forex reserves are managed by the Reserve Bank of India under the RBI Act, 1934 and the Foreign Exchange Management Act (FEMA), 1999, in consultation with the Government of India. They are composed of four main parts:

(a) Foreign Currency Assets (FCA), by far the largest component, mostly in US dollars, euros, British pounds, Japanese yen, and Chinese yuan, held in the form of deposits with foreign central banks, deposits with the Bank for International Settlements (BIS), and investments in highly rated foreign government securities (like US Treasuries, German bunds, etc.).

(b) Gold, held both in India (in RBI vaults) and overseas (with the Bank of England and the BIS).

(c) Special Drawing Rights (SDRs), an international reserve asset created by the IMF, with its value linked to a basket of currencies.

(d) Reserve Tranche Position (RTP) with the IMF, the quota-related amount that India can access from the IMF without conditionality.

Forex reserves are used to: (i) defend the rupee in times of stress; (ii) finance the trade deficit; (iii) service external debt; (iv) build international confidence in the economy; and (v) provide a cushion against sudden capital outflows.

Practice MCQs

Q1. With reference to recent reports about the RBI’s foreign reserves strategy, consider the following statements:

1. According to Bloomberg Economics, the RBI may have sold around USD 12 billion in gold reserves over a two-week period through 22 May.
2. The RBI is also reported to have bought about USD 7.5 billion in foreign-currency assets in the same period.
3. The reported sale of gold has been linked to pressure on the rupee from the Middle East war, higher oil prices, and capital outflows.
4. By end-March, India held about 880.52 metric tonnes of gold, with 77 per cent held domestically.

How many of the above statements are correct? (a) Only one (b) Only two (c) Only three (d) All four (e) None

Q2. Consider the following statements about the composition of India’s foreign exchange reserves:

1. Foreign Currency Assets (FCA) are the largest component of India’s forex reserves.
2. India’s reserves also include gold holdings, Special Drawing Rights (SDRs), and a Reserve Tranche Position (RTP) with the IMF.
3. India’s overseas gold reserves are mainly held with the Bank of England and the Bank for International Settlements (BIS).
4. Special Drawing Rights are an international reserve asset created by the World Bank, not the IMF.

Which of the above are correct? (a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four (Statement 4 is wrong; SDRs are created by the IMF, NOT the World Bank.)

Q3. With reference to the Strait of Hormuz and its importance for India, consider the following statements:

1. The Strait of Hormuz connects the Persian Gulf with the Gulf of Oman and onward with the Arabian Sea and the Indian Ocean.
2. Iran lies on the northern side of the strait, while Oman and the UAE lie to the south.
3. About a fifth of global oil trade by volume passes through the Strait of Hormuz.
4. India imports a large share of its crude oil from Gulf countries through the Strait of Hormuz.

Which of the above are correct? (a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

Q4. Consider the following statements about the RBI’s policy options for defending the rupee:

1. Selling US dollars in the foreign exchange market is one of the most direct tools used by the RBI to support the rupee.
2. The RBI can conduct buy-sell dollar-rupee swap auctions to inject rupee liquidity while temporarily acquiring dollars.
3. The RBI has no role in any kind of intervention in the gold market.
4. Easing overseas borrowing limits for banks and expanding FPI access to debt markets can help attract capital inflows that support the rupee.

Which of the above are correct? (a) 1, 2 and 4 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four (Statement 3 is wrong; the RBI is actively involved in the management of India’s gold reserves, as part of its forex reserve management framework.)

Answer Key

1. (d), All four statements are correct.
2. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because SDRs are created by the IMF, not the World Bank.
3. (e), All four statements are correct.
4. (a), Statements 1, 2, 4 are correct; Statement 3 is wrong because the RBI manages India’s gold reserves as part of its forex reserve framework, and can buy or sell gold.