In an effort to curb imports and take some heat off the plunging currency, India is considering a radical plan to direct commercial banks to buy gold from ordinary citizens and divert it to precious metal refiners.
India has the world's third-largest current account deficit, which is approaching nearly $90 billion, driven in a large part by appetite for gold imports from the world's biggest consumer of the metal. That has played a major role in driving the rupee to a record low.
With 31,000 tons of commercially available gold in the country - worth $1.4 trillion at current prices - diverting even a fraction of that to refiners would sate domestic demand for the metal. India imported 860 tons of gold in 2012.
In the pilot run, the Reserve Bank of India will ask the banks to buy back jewelry, bars and coins for rupees. Lenders will have to offer better rates than pawn shops and jewelers to lure sellers.
The RBI proposal was drew considerable discussion in world gold markets, although prices were reacting more to an easing of concerns that a U.S.-led attack on Syria was imminent. Spot gold prices fell by around 1 percent.
The source said banks in the pilot project would be given a regulatory directive to purchase the gold. It will initially be limited to those with big gold portfolios. Several Indian banks already offer a gold deposit scheme that pays out interest.
India's Trade Minister, Anand Sharma, suggested on Thursday that the central bank should look into the possibility of monetizing gold holdings, and issuing bonds for privately-held gold was one way to do it.
Any talk, however, of using the central bank's gold to help meet India's international obligations revives memories of a 1991 balance of payments crisis - when India flew 67 tons of gold to Europe as collateral for a loan to avoid a sovereign debt default.
Selling the country's gold reserves may sit badly with Indians, many of whom saw the 1991 sale as a public humiliation. While at the same time, Indians in some major cities have been flocking to jewelry stores to sell their gold pieces for cash. Jewelry associations in one city reported that thousands of customers were coming daily to take back cash in exchange for their gold jewelry.