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Gold comfort for India as prices rise

As stocks continue to fall on catching the global flu from nervous US and European markets and a slumping dollar, India's decision to buy itself some glitter two Diwalis ago has turned out to be a wise one. Gaurav Choudhury reports. Up, up and away

business Updated: Aug 21, 2011 01:27 IST
Gaurav Choudhury

As stocks continue to fall on catching the global flu from nervous US and European markets and a slumping dollar, India's decision to buy itself some glitter two Diwalis ago has turned out to be a wise one.

Between November 2009, when the Reserve Bank of India (RBI) purchased 200 tonnes of gold from the International Monetary Fund (IMF), and August this year, the value of India's official gold reserves has surged by Rs 29,759 crore or 37% — all in a matter of 20 months.

This rise in the value of the RBI's gold assets would be nearly sufficient to fund three-quarters of the government's flagship national rural employment guarantee scheme for this year.

India purchased the gold at an average price of about $1,045 per troy ounce (31.10 grams). International gold struck a record of $1,877 an ounce on Friday.

Finance minister Pranab Mukherjee and RBI governor D Subbarao piloted India's decision to strengthen the official yellow metal reserves to 560 tonnes amid growing interest of central banks across the world to diversify their holdings to assets other than the dollar.http://www.hindustantimes.com/images/HTPopups/210811/21_08_11-metro1B.jpg

The symbolism is inescapable in a country that worships the bullion and that pawned gold not too long ago.

In 1991, India had to pledge 67 tonnes of gold to the Union Bank of Switzerland and Bank of England to raise $605 million (Rs 2,843.5 crore today) to shore up its dwindling foreign exchange reserves, which stood at $1.2 billion.

Currently, India's foreign exchange reserves, which consist of foreign currency assets, gold, special drawing rights — an international reserve currency floated by IMF — and RBI funds kept with IMF, stand at $316.6 billion or Rs 14,33,372 crore.

With Standard & Poor's downgrade of US sovereign bonds, returns from foreign currency assets deployed by the RBI could dip further because of near-zero interest rates in these countries.

RBI's foreign currency assets consist mainly of US sovereign bonds. So, buying more gold will help the central bank diversify its assets and hedge it against a weakening dollar.

"Gold is a very secure and safe asset," said NR Bhanumurthy, professor at the National Institute of Public Finance and Policy in Delhi.

"Strengthening India's official gold reserves should be a long term strategy, but it should not be done explicitly for it might create volatility in the foreign exchange markets," Bhanumurthy said.

"In an uncertain situation in the past, the safe haven was the US and entities moved into dollar. But now, since the dollar is under attack, gold becomes the most attractive asset,"

C Rangarajan, chairman of the PM's Economic Advisory Council, said.