( Madan Menon Thottasseri)
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India’s purchase of 200 tonnes of Gold from IMF is creating a significant wave in the global financial system and both the Reserve bank Of India and the IMF twinkle in the lime-light while the whole world appreciates the golden move.
By third week of October,2009 the Foreign Exchange reserves with RBI was to the tune of USD 285 billion which were held in foreign currency assets, gold and SDRs with IMF. So far Gold worth USD 10 billion constituted just 4% of the reserves. By the current addition of 200 tonnes by paying around USD 6.7 billion, it will now constitutes 6% and RBI becomes one of the largest holders of gold reserve amongst central banks. This purchase deal enabled the Reserve bank to diversify the strategy in risk management of reserves.
Probably India’s bold move to shell out foreign currency reserves for gold will give a boost to the precious metal as the most preferred investment option. Gold prices are already ruling high is getting boosted up after the release of the details of IMF deal. When U.S Dollar registers around 15% fall against major currencies, gold is getting gained an identical margin.
As Reserve Bank of Indian allows scheduled Banks to peddle small coins and bars in gold to popularize investment and now resorting to gold imports from IMF will be a sensible move. Even China will follow India in Gold purchase though the domestically mined gold is building their reserves. The purchase from IMF with hard currency, not in IMF Special Drawing Rights confirmed India’s reserves being held mostly in U.S Treasuries. The present purchase of 200 tones constituting around 6% of reserves in gold is still low when compared to 20%, fifteen years’ back! At the same time the deal with IMF expressively reveal the India’s progress from the downfall of 1991 when the nation exhausted foreign exchange reserves and had to pledge 70 tonnes of gold to pay off import bills!
Being a country where gold ownership is a psyche and the world’s major gold hoarders are citizens of this country, the current reserve of gold seems to be a very small proportion.
The entire world speculates on the fate of the remainder gold with IMF. With an increasing distrust on paper currencies, China and a number of other countries like Russia, Mexico, Brazil and South Korea will be on the fray for purchasing gold to boost up their reserves by rebalancing asset portfolios. Japan, the world’s second-largest pile of currency too will follow suit.
IMF is the world’s third largest holder of gold after U.S.A and Germany. It approved the sale of 403.3 tons of gold on 18th September 2009 and the first sale of gold is getting off loaded to India .Thus India leaps past Russia to become the 9th biggest government holder of gold.
IMF will be back in lending business with more flush in liquidity by selling 400 metric tons of gold. The Indian purchase represents half of the quantity. Getting dollars for bullion will help IMF to finance and avoid the shaking up of markets. IMF will be succeeded to broad-base its long term sources of funds and can use the sale proceeds to bolster the exclusive line of credits to needy underprivileged nations.
U.S. economy is very much adversely affected due to the global recession and the financial melt-down is being felt leading to fiscal deficits. Still the U.S dollar will never be deposed from its supremacy in foreign- trade transactions, foreign-exchange and even as a world recognized principal reserve currency.
When the U.S dollar has weakened considerably followed by record low interest rate has instigated investors to go for stocks and commodity markets. Buying gold has to be seen as a hedge against the weak currency and the threat of inflation.
In our country, people use the yellow metal for wearing ornaments mainly to flaunt the family prestige and wealth, though gold is also a source of investment for old age and an indemnity against any threat of future calamities. Gold as collateral facilitates instant credit to all domestic and business needs. Gold Loan business is getting mushroomed in all parts of India and the Government of India should come out with new legislations to control, regulate and monitor the functioning of Gold Loan Companies.
People depend on Gold Loan Companies while banks or NBFCs are unapproachable to them for raising easy, immediate and uncomplicated finance.
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