RBI undertakes swap of old gold with new one

July 6, 2014

With a view to standardize gold stock, the Reserve Bank of India has initiated an exercise to swap old gold in its reserves with a new one. The apex bank has invited quotations from nominated banks for swap with the objective to optimize the management of its reserves.
The nominated banks, including State Bank of India, would import gold on behalf of RBI and then the yellow metal would be exchanged. Under this exercise, RBI would swap relatively impure gold including some dating back pre-independence period from its Nagpur vault and get the equivalent worth of purer gold. The operation would optimize the gold available with RBI to global standards and the gold acquired would be delivered to its foreign custodian, the Bank of England. The whole process would take place through book entry and without any cash exchange.
As of June 27, RBI had a gold reserve of worth $20.79 billion while total forex reserve $315.77 billion. RBI is expected to pass on its old gold onto the local market through nominated banks which would reduce the import of gold to that extent.
This would also help in boosting gold supply without straining the Current Account Deficit (CAD), which has come under pressure due to surging crude oil prices due to turbulence in Iraq. In order to curb rising CAD, the government had hiked import duties and RBI imposed limitations on import of gold and also introduced various pre-conditions for inward shipments of the yellow metal. Gold imports slashed 72% to $2.19 billion in May 2014 due to restrictions imposed by the government on inward shipments of gold to reduce the CAD. India’s CAD, which is the excess of forex outflows over inflows, reached a historic high of 4.8% of GDP in 2012-13, mainly owing to surging imports of petroleum products and gold. Too high CAD strains the rupee, which in turn makes imports costly and adds to inflation.