The purchase of a sizable quantity of gold by the Reserve Bank of India from the International Monetary Fund is significant not just for India but for the IMF, and the global financial system as well. The RBI has paid approximately $6.7 billion to buy 200 tonnes, almost half the quantity put up for sale in September. For the RBI, the transaction is much more than a strategy of diversifying the risks in the management of reserves, although that is an obvious outcome. During the third week of October, the foreign exchange reserves with the RBI amounted to $285 billion and they were held in foreign currency assets, gold, and Special Drawing Rights (SDRs) with the IMF. Like most other central banks, the RBI has kept the bulk of its reserves in U.S. government securities. Gold has so far accounted for just $10 billion or less than four per cent of the reserves — it will now constitute six per cent. The RBI is set to become one of the largest holders of gold reserves among central banks. The IMF, which plans to use the sale proceeds to buttress its concessional lending programmes to poor countries, has succeeded in broad-basing its long-term sources of funds. It has won appreciation for the way it struck the deal with a central bank buyer rather than with a number of market players. Several other central banks are expected to follow suit.
It might be too early to say conclusively; but it is very likely that India’s trend-setting purchase from the IMF will strengthen gold’s claim to be the preferred asset of diversification. Gold prices, already ruling high, received a further boost after the details of the deal were made public. To a large extent, the yellow metal’s recent strength mirrors the weakness of the dollar. Since March, the dollar has declined by 15 per cent against major currencies while gold has gained by an identical margin. The RBI’s action might spur other central banks to rebalance their dollar assets portfolio and move into gold in a bigger way. Indeed many of them, including those of China, Russia, and Mexico, have reportedly been accumulating gold.Yet the dollar — currently under stress because of the large fiscal deficits of the U.S. Government — is unlikely to be dethroned from its position of supremacy in global trade, foreign exchange transactions or even as the predominant reserve currency. For India, as much as diversifying its reserves, the deal with the IMF tellingly demonstrates the distance the country has travelled since 1991. Down to its lowest level of reserves, the country then had to pledge some 70 tonnes of gold to meet its immediate import bill.
Keywords: Reserve Bank of India, IMF, gold
As the Reserve Bank of India allows scheduled Banks to peddle small coins and bars in gold to popularize investment and now resorting to gold imports from IMF will be a sensible move. Even China will follow India in Gold purchase though the domestically mined gold is building their reserves. The purchase from IMF with hard currency, not in IMF Special Drawing Rights confirmed India’s reserves being held mostly in U.S Treasuries. By the purchase of 200 tones, India holds only around 6% of reserves in gold when compared to 20%, fifteen years’ back! Being a country where gold ownership is a psyche and the world’s major gold hoarders are citizens of this country; this seems to be very small proportion.
The entire world speculates on the fate of the remainder gold with IMF. With an increasing distrust on paper currencies, China and a number of other countries Brazil, South Korea will be on the fray for purchasing gold to boost up their reserves. Japan, world’s second-largest pile of currency too will follow suit.
IMF approved the sale of 403.3 tons of gold on 18th September 2009 and the first sale of gold is getting off loaded to India. Thus India leaps past Russia to become the 9th biggest government holder of gold.
The IMF will be back in lending business with more flush in liquidity by selling l 400 metric tons of gold. The Indian purchase represents half of the quantity. Getting dollars for bullion will help IMF to finance and avoid the shaking up of markets. IMF is the world’s third largest holder of gold after U.S.A and Germany.
When the U.S dollar has weakened considerably followed by record low interest rate has instigated investors to go for stocks and commodity markets. Buying gold has to seen a hedge against the weak currency and the threat of inflation.
In our country, people use the yellow metal for wearing ornaments mainly to flaunt the family prestige and wealth, though gold is also a source of investment for old age and an indemnity against any threat of future calamities. Gold as collateral facilitates instant credit to al domestic and business needs. Gold Loan business is getting mushroomed in all parts of India and the Government of India should come out with new legislations to control, regulate and monitor the functioning of Gold Loan Companies. People depend on Gold Loan Companies while banks or NBFCs are unapproachable to them.
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