Published On : Wed, Jul 2nd, 2014

Old gold lying in Nagpur may boost forex as RBI plans to swap the metal with purer stuff

Nagpur News

The saying ‘Old is Gold’ is likely to lose its shine, may be for better and more glitter, if the brainy scheme of things the Reserve Bank of India (RBI) planning, is to be considered in right earnest. Significantly, Nagpur City is also the part of the golden scheme of things the apex bank is taking ahead. The glittering plan is that the old gold being stored in RBI’s Nagpur vault since pre-Independence era would be exchanged with today’s top grade variety.

According to reports, RBI has floated a scheme for large lenders and international bullion banks by which they can strike ‘location swap’ deals. While the primary aim is to improve the quality of India’s foreign exchange reserves, the move would ease the supply of gold, even if temporarily, in the local market where duty barriers have given rise to smuggling. This is the first time RBI will carry out such swaps.
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. The plan is: 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 by the then Government and when Manmohan Singh was Finance Minister to avert an economic crisis. Even though the gold stocked abroad has long been freed of pledge, it was never necessary to physically ship the bullion to India. The finer points of the scheme are: First, the swap will allow 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 the reports. 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.

Eighteen years after it had pledged gold, RBI bought 200 tonnes of gold from the IMF in 2009, 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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