The Cassandras have been proven wrong — so far, anyway.
When the Reserve Bank of India (RBI) bought 200 tonnes of gold from the International Monetary Fund (IMF) in October 2009, some commentators had expressed doubts about this decision, and warned that a sharp fall in gold prices would result in big losses for India’s central bank.
Instead, prices of the yellow metal have steadily risen in both the local and the global markets since then. On July 9, prices in the global markets were around $1,212 per ounce, compared with the average of $1,045 paid by RBI for the IMF gold.
Following the global economic crisis and the exchange rate volatility, RBI decided to diversify the structure of its foreign exchange reserves, and hence bought the IMF gold.
As a prudent policy, RBI values its gold holdings at international market prices.
With the October purchase, gold reserves in RBI vaults rose to about 555 tonne. And with the steady rise in prices, the valuation of the central bank’s gold holdings also rose.
As a result, share of gold in India’s foreign exchange reserves has also gone up. On July 9, share of gold in the incremental reserves, at 65%, was huge.
Even on an absolute basis, the share of gold in India’s total foreign exchange reserves grew to 7% as on July 9, according to RBI’s weekly data. Just before the purchase, its share in total foreign exchange reserves was around 3.5%.
In terms of local currency, the position is even better. The value of RBI’s gold, as on July 9, rose on year by Rs 45,790 crore, more than the Rs 21,786-crore rise in total reserves. In that sense, gold saved the day for the central bank, because it more than countered the effect of a fall of Rs 47,211 crore in its foreign currency assets.
India’s foreign exchange reserves increased by $15.5 billion to $279.4 billion in the 12 months to July 9. The value of gold in the same period rose by $10.1 billion to $19.9 billion.
Going forward, some experts believe that gold may remain volatile in global markets in the short run, but its price will continue to rise in the medium term. In that case, RBI will have the last laugh. Newswire18
Comments