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In a display of the nation’s confidence in its own economic muscle, the Reserve Bank of India (RBI) concluded the $6.7 billion deal with IMF over the second fortnight of last month.
Finance Minister Pranab Mukherjee told a meeting with economic editors in the capital: “This goes to show that we have the money to buy gold and meet our import requirements. Despite the world economy stumbling, India and China were the only two economies to register growth. The world output increased due to India and China. India has the fifth largest gold reserves in the world.”
He mentioned the public outcry against the pledging of gold by the then government headed by Chandrasekhar in 1991.
Financial Chronicle in its April 15, 2009 edition had said India and China would press for the sale of IMF gold for money to provide stimulus packages for poor countries hit by the market collapse in the US and Europe.
In June 1991, India’s forex reserves had depleted to its worst level of $600 million, forcing the minority government of the day to pledge gold and invite public condemnation. Vishwanath Pratap Singh was the finance minister then. Today, the foreign exchange reserves are a healthy $285.5 billion.
Time and again Congress leaders hit out in past at centrist parties responsible for the pledging gold in 1991. In the Parliament session beginning on November 17, Mukherjee is likely to make a statement to prove the point that the Congress has managed the country’s finances well.
The IMF managing director, Dominique Strauss-Kahn, said, “I strongly welcome this transaction with RBI.”
IMF proposes to sell 403.3 tonnes of gold, one- eighth of its total stock. The buying of gold is part of RBI’s foreign exchange management policy. At the current market value of $1,045 an ounce, the cost to RBI for the 200 tonnes will be $6.7 billion. The gold will stay in IMF vaults.
After the purchase, RBI’s gold reserves will account for $17.71 billion (or 6.2 per cent) of the total foreign exchange reserves, up from $10.3 billion (3.7 per cent) now.
RBI’s foreign exchange reserves consist of foreign currency assets, gold, special drawing rights (SDRs) — an international reserve currency floated by IMF—and funds kept with IMF.
The biggest chunk of these reserves is in the form of foreign currency assets ($268.3 billion). SDRs at $5.267 billion and funds kept with IMF at $1.589 billion are the other components of the reserves.
Suresh Hundia, president of the Bombay Bullion Association, saw in the RBI decision an attempt to hedge its exchange risks. “The dollar is depreciating against major currencies,” he said. “So the government is trying to hedge its risk by buying up gold in lieu of dollars in the reserves. The government is thinking of buying more gold from IMF, which is a good move.”
The finance minister had a word of caution against reposing more faith in gold than in the dollar. Mukherjee said, “Our advice to RBI was that if you are in a position to buy (gold), you must. But don’t give it too much significance.”
The IMF executive board on September 18 announced its decision to sell 403.3 tonnes of gold to raise funds to be lent to low-income countries. It also decided that the initial offer of gold sale would be directly to official holders, including central banks.
Aram Shishmanian, chief executive officer of the World Gold Council, said, “The fact that these sales will effectively rescue IMF from a difficult situation regarding its own finances is proof of the metal’s unique investment characteristics, long recognised by central bankers, institutional and individual investors alike.”
The increase in the foreign exchange assets of RBI comes not only from the exchange interventions it has undertaken in the market but also from returns on investments and valuation changes.
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