The surge coincided with a recession in domestic investment in industry and housing; savings were diverted to gold. This is slated to be reversed now that investment, including housing demand, is showing signs of acceleration.

More importantly, falling prices rob gold of its role as a hedge against inflation. True, a sharp depreciation of the rupee could turn the tide in favour of gold priced in rupees. But in the near future, gold may decline more than the rupee as India's demand for goldwanes.

Should the RBI sell its gold and hold $2.9 billion instead in convertible currencies? It would be prudent to sell since its price in convertible currencies is bound to fall. Holding gold realisations in foreign currencies aren't risk-free: all are subject to fluctuations.

Perhaps the RBI could switch into SDRs. What about private gold stocks which are many times larger than the RBI's stock? They could flow into Sinha's gold-for-gold deposit plan. But it won't be easy for banks to value gold deposits in a falling market or to arrive at the rationale on the interest payable. More fundamentally, what will banks do with the depreciating asset, gold? Perhaps they could supply it for ornament export. But then why not straightforward gold exports by the private trade? That would give private holders the option to switch from gold to other assets.