MUMBAI (Commodity Online): Gold prices in the Indian bullion market zoomed on Tuesday on the big news that the International Monetary Fund (IMF) has sold 200 tonnes of gold to the Reserve Bank of India (RBI) for $US6.7 billion.

Why did India buy the IMF gold? Does India want to catch up with China in mopping up gold reserves by buying the IMF gold?

In April this year, IMF decided to sell 403.3 tons of gold as part of a plan to shore up its finances and lend at reduced rates to low- income countries. In the last few months, there have been reports that China and India could be the suitors to purchase the IMF gold. Now, India has jumped into the fray by buying almost half of the IMF gold at about $1,045 an ounce.

Dubai-based bullion analyst Mark Robison says everyone expected China to buy the IMF gold in the first phase. “It is a surprise that India has jumped in the first place to purchase the IMF gold. India is the largest marketplace for gold in the world. I think by buying IMF gold, India has shown increased interest in diversifying out of US assets as the dollar loses value against other currencies,” Robison told Commodity Online.

China is the world’s biggest gold producer. In April, China increased reserves of gold by 76 percent to 1,054 tons since 2003.

In fact, IMF has kick-started the gold selling plan by selling the first tranche of the yellow metal to India, the largest consumer of gold in the world. The gold sales were conducted daily over a two-week period from Oct. 19-30, to "give some protection to short-term fluctuations in the market".

The sale is part of an agreement struck in September among IMF member countries to sell 403.3 tonnes of the fund's gold stocks to diversify its sources of income and to increase low-cost lending to poor countries.

"I strongly welcome this transaction with the Reserve Bank of India," the IMF's managing director, Dominique Strauss-Kahn, said in a statement.

"This transaction is an important step toward achieving the objectives of the IMF's limited gold sales programme, which are to help put the fund's finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries"

India's RBI paid on average about $US1,045 ($NZ1481) an ounce for the gold and the transaction would be paid in hard currency and not in IMF Special Drawing Rights, the IMF's internal unit of account.

On Tuesday, gold prices advanced near another record in Asian trade mainly on reports of IMF’s 200 metric tone gold sale to India. Spot gold was seen trading at $1,064.99 an ounce at 11:15 a.m. in Singapore while December-delivery gold was at $1,065.50 an ounce on the New York Mercantile Exchange’s Comex division.

IMF has declined to say whether other central banks have expressed interest in buying the remaining 203.3 tonnes of gold on tap for sale. He said if no other central banks came forward, the IMF would proceed as planned to sell the gold in the market.

But bullion analysts in India said the country’s decision to buy the IMF gold is a plan from the RBI to shore up its bullion reserves. "India is keen to acquire more gold reserves after news came out that China is frantically trying to shore up its gold reserves. Also, falling rupee value must have prompted the RBI to buy the IMF gold," said Sukhdev Sharma, a Mumbai-based bullion analyst.

On the IMF gold sale to India, IMF Managing Director Dominique Strauss- Kahn said.“This transaction is an important step toward achieving the objectives of the IMF’s limited gold sales program, which are to help put the fund’s finances on a sound long-term footing and enable us to step up much-needed concession lending to the poorest countries.”