Reserve Bank of India apparently plans to start leasing its gold
The idea is said to be intended in part to relieve a gold shortage in India but looks like it would relieve a shortage in London too.
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RBI Plans to Swap Old Gold in Nagpur Vault with Purer Variety
By Sugata Ghosh
The Economic Times, Mumbai
Wednesday, July 2, 2014
MUMBAI -- Old isn't always gold -- at least, not for the Reserve Bank of India (RBI). There is a plan to swap some of the old gold lying in RBI's Nagpur vault since pre-Independence times -- and whose quality is not exactly top-grade -- with purer gold.
The country's monetary authority has sounded out large lenders and international bullion banks to strike "location swap" deals. While the primary aim is to improve the quality of India's foreign exchange reserves, the move would ease the the supply of gold, even if temporarily, in the local market where duty barriers have given rise to smuggling.
Three senior bankers and two gold traders ET spoke to confirmed that the RBI, outlining the transaction in a recent communique, has called for bids from banks. This is the first time RBI will carry out such swaps.
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Better known as loco swaps in the global bullion market, it's a mechanism whereby gold in one location is "swapped," or exchanged, for gold in another location without physically shipping the yellow metal.
Here's how the proposed swap scheme between RBI and banks would work:
The RBI will give delivery of gold from its Nagpur vault to banks in India while taking delivery of gold from banks in London.
But the gold that RBI would give to banks in India could be of a slightly inferior quality compared with the "London deliverable" purer gold that it would receive from banks in London. The banks will deposit the gold in London in RBI's account with Bank of England.
Gold accounts for $20.8 billion of India's $315 billion forex reserves. Most of the gold is in Nagpur and some of it is parked with Bank of England where gold was shipped in 1991 to avert an economic crisis. Even though the gold lying abroad has long been freed of pledge, it was never necessary to physically ship the bullion to India.
"The scheme makes sense. First, the swap will allow the RBI to have more of liquid and highly tradable quality gold that will be held in London. Second, as it supplies gold to local banks, it could increase the supply of gold in India without causing an immediate dollar outflow and straining the currency market," said a treasury head of a bank.
The bank that takes gold from RBI in India need not outright purchase gold in the international market for delivering the bullion to RBI in London. It's possible for the bank concerned to borrow gold at the prevailing gold rate and postpone payment for eight to nine months.
RBI officials declined to comment on the swap plan.
According to a bullion dealer, while it's imperative for the RBI to keep the current account deficit at a low level to which it has fallen now, the proposed move would also enable the monetary authority to achieve better earnings on its forex reserves.
Eighteen years after it had pledged gold, in 2009, the RBI bought 200 tonnes of gold from the IMF -- a development that took many by surprise. The present initiative, if it takes off, could go down as an innovative plan on forex reserve management.
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