Reserve Bank and Gold
Reserve Bank of India Governer Duvvuri Subbarao has done something the average Indian housewife would readily approve of. The RBI’s decision to quietly buy 200 tonnes of gold worth $6.7 billion from the International Monetry Fund (IMF) has surprised many around the world.
Although Indians are the world’s largest consumers of gold, in the form of jewellery, bars and coins, it wasn’t much sought after by the RBI. Of India’s $285 billion forex reserves, only $10 billion was estimated to be held in the form of gold.
In fact, the proportion of gold as part of its total foreign reserves has gradually declined over the years, from 20 per cent in 1994 to below 4 per cent now. The latest tranche of gold shopping increases its proportion to 6 per cent, making India’s central bank the tenth largest accumulator of gold.
While the sale would provide the cash-strapped IMF with much needed liquidity to enable low interest rate lending to poor countries, India’s purchase is seen as a move to diversify its reserves in a volatile currency market. But some also see a geopolitical motive behind the deal. India, like China, is also seeking closer ties with the IMF to assert its authority on the global economic stage. Prices rose after Sri Lanka too bought a small volume of bullion to diversify its reserves.
Sri Lanka’s move was seen as providing further evidence that central banks in emerging economies have decided to increase their gold holdings to diversify their currency reserves.
The gold price has hit yet another new high on the back of a floundering dollar and rising concerns over major central bank policies. Following the weekend’s G20 meeting to discuss economic stimulus measures, the spot gold price sharply broke through the psychologically important $1,100 per ounce level to hit a high of $1,132.95 per ounce on Monday. “Every other central bank must now be wondering who will move next,” said Francisco Blanch, head of global commodities research at Bank of America-Merrill Lynch.
Nothing that discomfort over the dollar’s weakness was mounting, BofA-Merrill Lynch said India’s decision to diversify into gold could signal a realisation in the developing world that the “beggar-thy-neighbour” policies pursued by some G10 nations to get out of recession had natural limits. Mr Blanch reiterated his forecast for gold to break through $1,500-an-ounce within 18 months. “The market could of course move a lot faster if emerging market central banks rush into gold sooner rather than later” said Mr Blanch.
Tags: Gold, gold bars, Gold Bullion