Commodity Online
Foreign exchange reserves of India and China slumped in January-February and both the countries may go for more accumulation of gold which may have an impact on the global bullion markets.

Even as recession is wreaking havoc across economies, more and more countries, especially Asian economies, are moving to gold as reserves.

According to reports, China’s foreign exchange reserves, the world’s largest, fell by about $30 billion in January, partially due to a drop in the value of non-dollar assets.

Same is the case with India. Its foreign exchange reserves declined by $1.98 billion to $247.29 billion in the week ended March 6, 2009, following revaluation of international currencies against US dollar.

The foreign exchange reserves have declined by $62.43 billion since the end of March 2008. The fall in reserves since end of December 2008 is $8.6 billion.

However, a serious thinking among Asian nations to shift to gold as foreign exchange reserve is happening.

India’s total gold holdings is between 10,000 tonnes and 15,000 tonnes of which the Reserve Bank of India has only around 400 tonnes. Internationally, the total gold reserves (amount of gold ever mined) is between 125,000 tonnes and 130,000 tonnes, of which roughly 25,000 tonnes is held by various central banks. Most of that is held by the central banks of the United States, Germany, Switzerland, France and Italy.

While the share of gold in total foreign exchange reserves is very high in United States and European countries, the share is comparatively lower in Asian countries.

China and India have been mulling to add more gold to their foreign exchange reserves for quite sometime.

In fact, in the recent past China’s plans to hike gold reserves had impacted the bullion market.

With recession looming large over almost all economies, emerging market economies have started accumulating foreign exchange reserves on an unprecedented scale.

Because, high foreign exchange reserves are often seen as a strength indicating the backing a currency has.

What is stopping several countries to switch over to gold is that the yellow metal does not earn any interest, other than the return that it fetches if lent. This is the primary reason why central banks in many countries decided to reduce their gold holdings.

The gold’s share of reserves was above 10 per cent in 2006. This is mainly because of the sharp rise in the price of gold.

The three components of India’s foreign exchange reserves are gold, special drawing rights and foreign currency assets. India is constantly accumulating its foreign exchange reserves to meet the requirements of its increasing current account deficit and to protect against volatile capital flows.

With the growth of the domestic industry and higher oil prices in international markets, the current account deficit is expected to widen in the coming years.

This means that the country would require more foreign exchange reserves to manage the foreign exchange demand that will arise from current account transactions.

The objectives of reserve management in India are preservation of long-term value of the reserves in terms of purchasing power and the need to minimise risk and volatility in returns. Hence, gold being highly liquid can serve this purpose.

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