L THE SHINE IS BACK

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.