Analysis of public data suggests the Reserve Bank of India may have sold a portion of its gold holdings to shield its foreign exchange assets from the ripple effects of conflict in the Middle East.

A senior economist for India at Bloomberg Economics, Abhishek Gupta, wrote in a report that over the two weeks ending May 22nd, the central bank potentially sold approximately $12 billion worth of gold reserves while purchasing $7.5 billion in foreign exchange assets.

Despite India raising import duties on gold—a move that should have increased the value of its gold and dollar-denominated assets—the reported value of gold reserves in the central bank's statements declined. Gupta interprets this as indicative of the central bank selling gold.

The Reserve Bank of India has not immediately responded to requests for comment on the matter. This suspected sale underscores policymakers' concerns about the pressures currently facing India.

With tensions persisting around Iran and the Strait of Hormuz effectively blocked, India is grappling with sustained capital outflows alongside rising oil prices. This move also signals that, against a backdrop of a widening current account deficit, the Indian central bank is prioritizing the maintenance of more liquid foreign exchange reserves.

Previous reports indicated that RBI Governor Sanjay Malhotra is evaluating all available options to stabilize the rupee, including potential interest rate hikes and raising dollar funds from overseas investors. The central bank's interventions in the foreign exchange market have shown initial success; since hitting a record low on May 20th, the rupee has outperformed most other Asian currencies.

On Tuesday, the rupee weakened by 0.2% to 95.20 against the US dollar. As the world's third-largest oil importer, India is rapidly depleting its foreign exchange reserves due to the Middle East conflict driving up energy costs and battering the local currency.

The Indian government has intensified efforts to curb capital outflows and mitigate the war's economic impact, implementing measures such as increasing fuel prices and more than doubling import duties on precious metals. Further steps to support the rupee are expected as early as this week.

Gupta believes the Reserve Bank of India will likely continue to rebuild its foreign exchange reserves when conditions permit. He wrote, "Periods of dollar weakness, renewed foreign inflows, or falling oil prices would present opportunities to accumulate more foreign exchange assets."

As of the end of March, the Reserve Bank of India held a total of 880.52 tonnes of gold, with 77% stored domestically. Six months prior, this proportion was 66%. In its semi-annual foreign exchange report released in April, the central bank stated that the majority of its overseas gold reserves are held with the Bank of England and the Bank for International Settlements.

In recent years, the RBI has significantly accelerated the pace of repatriating gold to India, signaling a growing concern, shared with other emerging market central banks, over the risks to overseas reserve assets following the freezing of Russian assets by Western nations.