The study by Reserve Bank of India (RBI)?has found that central banks in most of the EMEs and advanced economies had either bought fresh stock of gold or stopped selling? their existing stock of gold in the wake of the ?recent global crisis?.
The study ?Recent Global Crisis and the Demand for Gold by Central Banks: An Analytical Perspective”?said India is no exception and in India?s case, while foreign reserves increased substantially over the years, the physical stock of gold as part of official reserves, however, remained stable.
What constitutes the ?optimum level of gold? for India is, of course a difficult question to address and unfortunately even international experience is scarce on this question. However, there is strong economic rationale to hold sufficient quantity of gold as part of official reserves, especially during the uncertainty. This was strongly supported by economic rationale to hold sizable reserves of gold especially during ?heightened uncertainty?. India?s purchase did not, apparently, have any impact on the gold price trend and to stock up gold is in line with the global trend.
When India purchased 200 tonnes of gold under the International Monetary Fund’s limited gold sales programme, it was interpreted that it may further inflate the gold price when the price was already ruling high. This motivated RBI to examine the general trend among the central banks? demand for gold during recent global financial crisis.
The study has said in the wake of global crisis and the consequent heightened uncertainty, there has been high demand for gold from the central banks across the globe. ?Eventually, gold?s proportion in the total foreign reserves sharply came down. In fact, even with the latest purchase of gold by the RBI, gold accounted to just around 7.9 % of the forex reserves. This is very small when compared with a sizable holding by a number of central banks in advanced countries and even some EMEs as pointed out above.
In that context, India?s purchase of gold as a diversification strategy is fully justified and is in line with the global trend and still there is scope to increase its holding,” said the RBI study.
India?s recent purchase of 200 tonnes of gold, apparently, did not cause any aberration on the international gold price trend, probably, as gold was not bought from the open market. Similar method can be followed even in future, preferably in smaller quantities. Further, as India is a depository of huge private gold holdings, this can be channelled into official reserves especially those available in the form of coins and biscuits. This will also provide opportunity for the private holders to liquidate gold without much loss as presently banks are not permitted to buy back gold from the public.
In the context of increased degree of uncertainty, especially when the dollar became subject to tough challenges when US attempted to salvage its economy by pumping in with heavy stimulus packages, there was a fear that it may accelerate the process of depreciation of the dollar. In these situations, gold continued to maintain its value and therefore it is considered to act as a hedge against loss of wealth.