UPDATE 2-India central bank seeks to swap gold to improve reserves quality
* Location swap to boost offshore holdings
* Gold from RBI vaults to be sold on local market - sources
* Eases supply squeeze following gold import curbs (Adds details, market impact)
By Suvashree Dey Choudhury and Siddesh Mayenkar
MUMBAI, July 2 (Reuters) - India's central bank said on Wednesday it has sought quotes from banks to swap gold in its own vaults for international-standard gold, aiming to improve the management of its reserves.
The Reserve Bank of India said the operation would "standardise the gold available with RBI in India with respect to international standards" and the gold acquired would be delivered to its overseas custodian, the Bank of England.
By holding gold reserves in London, the RBI would gain flexibility to mobilise them if needed to defend the currency. It shipped some of its gold holdings to Britain in 1991 as part of a series of emergency measures to tackle a financial crisis.
Under the leadership of Governor Raghuram Rajan, appointed last year, the RBI has sought to modernise its market operations and improve the management of gold and foreign currency reserves that are worth a total of around $315 billion.
According to the World Gold Council, India holds the 11th-largest gold reserves of 557 tonnes. At current market prices, they would be worth nearly $24 billion. It was not immediately clear how much of that would be swapped.
"RBI, in consultation with the government, would decide further in regard to quantity, swap-ratio, timing etc. of the gold to be swapped," the RBI said in an emailed response to questions from Reuters.
The Economic Times reported earlier that the RBI had sounded out bankers on a plan to swap some of the old, relatively impure, gold that has been lying in its own vaults since before independence in 1947.
Market participants said the central bank was likely to offload its old gold onto the local market in India.
That would have the beneficial effect of boosting domestic gold supply without hitting India's current account - which faces renewed pressure as the conflict in Iraq has pushed up India's oil import bill.
The current account deficit had touched a record high of 4.8 percent of gross domestic product in 2012/13.
"It's a good move by the RBI, this will at least ease the stock requirement of the jewellery industry," said a senior official with a foreign bank that supplies gold to India.
"Once the stock gets into the market, premiums will come down, and smuggling would be less profitable," said the source, who declined to be identified as he was not authorised to speak to media.
Premiums may fall to $5-10 an ounce on London prices, from the current $25, when new supplies come to the market, said Kumar Jain, vice-chairman of Mumbai Jewellers Association.
The central bank imposed the import restrictions last year in a successful bid to contain a balance of payments crisis, but the unintended result has been a large increase in gold smuggling into India, the world's second largest consumer of the precious metal after China.
Part of India's consumption was met through illicit imports. The WGC reckons that 200-250 tonnes of gold have been smuggled into India since the imposition of import controls. Only 2.5 tonnes of smuggled gold - or 1 percent of the estimated total - have been seized by law enforcement agencies.
The move comes just over a week before Finance Minister Arun Jaitley unveils his first budget, in which he faces a challenge to curb state borrowing after a two-year slowdown in growth.
Jaitley is also battling inflation amid a food price scare and delays to the planting of summer crops resulting from a weak monsoon. At times of high inflation, many Indian households take refuge in gold to protect the value of their savings. (Editing by Douglas Busvine, David Evans and Keiron Henderson)