RBI exchanging onshore gold for international gold should boost INR stability
On Wednesday the Reserve Bank of India (RBI) announced plans to swap domestic gold reserves with international gold held in London. Details around the amount and timing have yet to be disclosed, but at the minimum the plan should boost India’s domestic gold supply, thereby reducing near term gold imports and current account deficit.
Under such a scenario, the RBI would likely sell dollars to buy gold in London and sell gold onshore to buy rupees. The RBI’s nominal gold holdings would remain the same, though in a different physical location, while its dollar-denominated foreign reserves would shrink. From a central bank balance sheet perspective, this is similar to selling dollars and buying local currency directly (which should strengthen rupee). Similarly, the supply of rupees would shrink while the global supply of dollars would rise, which should also lead to rupee strength. This is effectively “frictionless” FX intervention.
Read the full report: UBS