MUMBAI (Commodity Online): India has been the biggest consumer of gold till now. With the RBI’s decision to buy 200 tonnes of the International Monetary Fund’s gold at $6.7 billion the country has become the 10th biggest holder of the yellow metal in the world.
To add to that the deal has also helped India diversify its reserves. Again it has signaled that India’s economy has come full circle. It is also is a way of spreading its assets which are said to be currently over-weighted with foreign currency, mainly in the form of sovereign US Treasury bonds. In other words, it is a hedge against a falling dollar.
India is the world’s largest private gold consumer, but the government’s holding of gold as an asset is modest. Even so, the latest purchase puts it at Number 10 among the list of top 10 gold-holders in the world.
Of India’s current foreign exchange reserves of nearly $285 billion, foreign currency assets account for more than 90% ($268.3 billion), followed by gold ($10.3 billion), IMF’s special drawing rights ($5.2 billion) and a reserve position in the IMF of $1.59 billion.
While India’s current gold holdings, accounting for just 3.7% of assets, are said to be historically low, buying 200 tonnes in addition to the 358 tonnes it already holds is expected to bump up the gold reserves to more than 6%.
An RBI statement said the purchase of gold was made as part of the bank’s foreign exchange reserves management operations.
India built up its gold reserves to over 20 percent of its foreign reserves in 1994 after a balance of payments crisis in 1991. But the proportion of gold has since fallen significantly as total reserves swelled.
Another reason behind the buying may be India’s push for a larger voting share in the IMF. India, with other emerging economies, has pressed for greater influence in world economic affairs as it has grown rapidly into a $1.2 trillion economy.
India, along with China, has been pressing for a larger representation in the IMF and had promised to augment its resources for lending to developing countries. By buying gold from the IMF, New Delhi may be trying to assert its authority in the global economic stage.
The RBI’s gold purchase has not had any immediate impact on gold demand as prices are already high and buyers are staying away.
But analysts say the RBI move at the current high price is expected to raise the psychological price level at which Indians buy gold. This would also help raise the demand for gold in the medium term.
Central banks across the globe have been buying gold as part of the strategy to diversify their holdings keeping in mind the prospective dollar weakness. Gold also serves as a very good inflation hedge and has seen good amount of interest from institutions and fund houses looking to protect the value of their assets.
Gold is a good safety net and considered a good investment. In 1991-92, India sold gold to meet the foreign currency requirements as the country did not have enough reserves to finance imports.
