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RBI may accumulate more gold to protect against a weak dollar

business Updated: Nov 04, 2009 20:05 IST

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The Reserve Bank of India (RBI) may move forward to accumulating more gold as the yellow metal is expected to shine in the years to come, an analyst with a broking firm said on Wednesday.

"A weaker dollar could diminish the value of India’s foreign exchange reserves and hence this could lead to further accumulation of gold by the RBI. This move will help India's central bank to hedge its downside risk on the foreign exchange reserves front," Angel Commodities Broking analyst Amar Singh said in Mumbai.

"India's gold holdings have dropped from over 20 per cent in 1994 to just 4 per cent," he said.

The RBI has purchased 200 tonnes of gold from the International Monetary Fund (IMF) for USD 6.8 billion. This move by the RBI is to diversify its foreign exchange reserves.

"We feel the RBI could move forward to accumulating more reserves as gold is expected to shine for years to come. The Dollar Index has weakened sharply and at the same time gold prices have gained phenomenally," Singh said.

"Prices of gold are expected to rise further and this has initiated the move by the RBI to diversify the foreign exchange holdings."

India is the world's biggest gold consumer and the RBI's move indicates the central bank wants to diversify its holdings to protect against a slumping dollar, he said.