The Reserve Bank of India Swaps Old Gold For New

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Gold Prices Going Up

India’s central bank, the Reserve Bank of India (RBI), has found a novel way of tackling the nation’s gold import deficiency without affecting the Current Account Deficit (CAD). It has decided to swap old gold, 557 tons worth some $21 billion, in its reserves, with new gold, with the aim of standardizing its yellow metal stock.

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The move is expected to have fiscal benefits. The increase in domestic gold supply will not put pressure on the CAD, which, at present, is under stress due to rising crude oil prices in the wake of the Iraq conflict. It would also ease India’s balance of payment. In order to check the rising CAD, the Indian Government had raised import duties, while the RBI had imposed curbs on gold imports, in addition to prescribing pre-conditions for inward shipments of the yellow metal. Smuggling gold into India has become a healthy black market, but that is likely to come down once domestic supply increases.

As part of the move to swap its gold, the central bank has asked nominated banks, including the State Bank of India to submit quotes. The chosen bank will import gold on behalf of the RBI and subsequently the metal would be swapped. The bank holds the 11th largest gold reserve in the world.

According to a report in the Business Today, the RBI will exchange “relatively impure gold,” including some dating back to the pre-independence (1947) era, and get the equivalent worth of purer yellow metal.
When the standardization operation was over, the new gold acquired will be delivered to its overseas custodian, the Bank of England. The entire exercise will take place through book entry and without any cash exchanging hands, sources said.

This is not the first time that the RBI has made such a move. It had parked gold abroad during the 1991 financial crisis, and in 1998, before Russia’s default and devaluation caused a meltdown across emerging markets.
India’s gold imports had come down by 72 percent to US $2.19 billion in May due to restrictions imposed by the government on inbound shipments of the precious metal.

Rising gold and petroleum imports had led to the CAD touching a historic high of 4.8 percent in 2012-13 due to the excess of foreign exchange outflows over inflows. India had paid US $54 billion to import 1,017 tons of gold that year. A high CAD puts pressure on the currency, leading to inflation.

Currently, Indian banks import gold for jewelers, and then they can only re-import another batch if 20 percent of the last batch has been exported. There’s a 10 percent duty on imported gold. MetalMiner has been following the gold import duty story on a regular basis.


Comments (4)

  1. Vipin says:

    Please can someone let us know how will it solve the CAD issue. As bank who is going to BUY the gold from RBI will either buy the metal overseas by paying USD and then deliver to RBI account Loco London.

    This is how the SWAP will work, you buy from RBI Loco India and then deliver to RBI Loco London by buying from oversea bank paper gold.

    So at the end of the day the bank in India will have to remit USD oversea.

    The only case where no remittance is required is if RBI sells GOLD Loco India and does not ask for a SWAP.

    1. Jeff Yoders says:

      Vipin, Sohrab Darabshaw wrote: “…in accouting parlance, this is a mere book entry. The same ton out, the same ton in, only slightly more pure and standardized. India will release the old gold in only the domestic market, thus stopping Indian jewelers from importing gold for their needs (which they have been doing) and increasing the CAD; it helps the Indian Government to eventually get the international price of standardized gold in the global market. If the government wants to sell or mortgage the new gold from now on, it is standardized. The jewelers making purchases do not mind such old gold because, for jewelery, they can melt down the gold and add copper, etc. to it.”

  2. Jeff Yoders says:

    Also, Sohrab adds “We are not saying it will ‘solve’ the CAD issue. All we are saying is the swap will not push up the CAD further because it does not involve any importing of gold by jewelers, which is the primary reason why the CAD goes up. And, in fact, because domestic goldsmiths will get gold from the RBI itself within India when the latter starts offloading old gold here. They will have to import less which also means no upward push to CAD.”

  3. Vipin, the most likely winner of this contract is MMTC-PAMP who will buy loco Indian and pay RBI in Rupees and sell RBI loco London in USD. Yes RBI send USD but that is offshore anyway, key is no gold goes in or out of India so no CA effect. See my blog post on it for more detail

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