NEW DELHI (Reuters) - India's central bank should look into the possibility of monetizing gold holdings, Trade Minister Anand Sharma said on Thursday, in the latest proposal aimed at combating a yawning current account deficit that has hammered the rupee.

It was not immediately clear whether Sharma was referring to the 557.7 tonnes (1.1023 tons) of gold the Reserve Bank of India (RBI) holds in its own reserves, or gold in private hands. He did not give more details of how the proposal would work.

India has the world's third largest current account deficit (CAD), which is approaching nearly $90 billion, driven in large part by a huge appetite for gold imports.

The deficit has helped undermine the rupee, the worst performing major currency since May.

Any talk of using the country's gold to help meet India's international obligations revives memories of a 1991 balance of payments crisis - when India flew 47 tonnes of gold to Europe as collateral to avoid a sovereign debt default.

"I have not said there should be any mortgaging of the gold, or auction of the gold, that is incorrect. I have just said the RBI should look into ... how they can benefit the people, particularly with regard to the bonds or the monetization," Sharma said in response to a question in parliament.

Earlier in the week, Sharma said he thought that something could be done along those lines and that if "even if 500 tonnes is monetized at today's value it takes care of your CAD," in comments reported in the national media.

He emphasized that it was up to the RBI to decide its policy on gold and that it was beyond his jurisdiction.

In comments published by The Hindu newspaper last week, David Gornall, chairman of the London Bullion Market Association, said India could raise $23 billion by swapping gold for a payable currency for a period of its choice, while remaining the long-term holder of the gold.

(Reporting by Rajesh Kumar Singh; Writing by Frank Jack Daniel; Editing by Kim Coghill)

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