The truth behind the saying "never let a crisis go to waste" transcends both time and space, and it most certainly has no problem crossing the border into India, which over the past weeks has found itself in full monetary crisis, and whose currency is plunging to fresh record lows on a daily basis forcing its central bank to scramble with both tightening and QE at the same time. And if the influential Hindu Business Line, is correct, India's crisis is about to become someone's opportunity. Potentially for that someone which over the past two months has found themselves in a huge physical gold shortage as the now constantly negative GOFO rates confirm. Because according to Royal Bank of India sources cited by the HBL, India is now considering leasing out the 200 tonnes of gold it bought from the International Monetary Fund in 2009.

For India, this may be the nuclear option: its central bank, starved for dollars, is considering every initiative to procure short-term dollar liquidity to fund massive USD-denominated investor withdrawals out of the country, which as hammering the Indian Rupee, and which if unmet, threatens the entire financial system in the country.

Indeed, as the HBL reports that the gold will be leased in the international market for dollars so as to shore up the sagging rupee, which plunged below Rs 64 against the US dollar in Tuesday’s trade. A final decision may be taken next month, Finance Ministry sources said.

The move can fetch around $23 billion, David Gornall, Chairman of the London Bullion Market Association, has estimated. This marks a tidy increase in the Reserve Bank of India’s investment. In November 2009, the RBI purchased 200 tonnes of gold from the IMF, under the Fund’s limited gold sales programme, for $6.7 billion, cash.

$23 billion for a $6.7 billion investment: not a bad return. And why not do it: after all it's not like India actually has possession of the gold, which most likely is located somewhere deep beneath the New York Fed. Ot is that the JPMorgan office at 1 CMP?

According to RBI sources, this gold was never brought into the country. It was just a book transfer. Speaking at the India International Gold Convention in Jaipur last week, Gornall had said the RBI can organise a gold-dollar swap without divesting its holding or incurring any further interest charges. “By swapping gold for a payable currency, you can benefit by having access to dollars for a period of your choice, while remaining a long-term holder of the gold, as the swap is a transfer of asset for a limited period. You will have bullion bank counter-party risk but this is successfully managed at the RBI, which has the strictest lending criteria of any central bank in the world,” Gornall had argued. Finance Ministry officials agree.

Remember when Bernanke said gold is not money? He was right: for India, it is more.

Talking about the leasing arrangement, a Ministry official said that since gold was the most liquid of assets, it can be readily leased, and returned by the lessee to the lessor any time. Further, a lease transaction means the RBI’s gold holding will not come down even as it unlocks the asset’s value.

What is left unsaid here is that there is a flipside to the $23 billion for $6.7 billion quid-pro-quo. The leased gold may just stay with the lessee should the Indian crisis accelerate, and should it find itself unable to stabilize the situation in the near term, leading to a full USD-exodus, one which wipes out the country's entire exchange reserves. Currently, India has foreign exchange reserves of around $278 billion. Which is great if India had no other USD cash needs, however, being a net importer, thsi amount would be sufficient to fund the import bill for about six months. In other words, the country's regime can get emergency liquidity, however if it doesn't stabilize its monetary situation in half a year, then all bets are off, and the warrants attached to India's gold in the FRBNY gold vault will quietly be reattached to some other entity.



Finally, and as reported here extensively, India has recently set off on an unprecedented series of capital controls when it comes to its domestic gold market, desperate to prevent a negative current account where citizens convert a rapidly devaluing Rupee into gold, a dynamic which will have only accelerated as the INR has plunged to records over the past week. What message will the RBI send to its people if it itself is forced to rely on gold as the final backstop to its operations is very much clear. What is unclear is what happens as ever more paper currency is converted in yellow metal in India, exacerbating the current account deficit, and resulting in a Catch 22 where the central bank needs more and more sources of liquidity to offset the outflow of currency.

The good news, if any, is that at least someone will satisfy a craving for 200 tons of physical, which can than be repackaged in the form of the paper gold market into an infinity of paper claims on the underlying gold, to which nobody really holds title except the actual custodian of the physical.

Perhaps most amusing about the above episode is that when India's Economic Affairs Secretary, Arvind Mayaram, was sought for commentary he said there is no proposal to lease the purchased gold. His comments came in a text message. We will check back with him in a week or two.