Tarapore for increasing gold component in forex reserves

Mumbai, Nov 28 | Updated: Nov 29 2006, 08:29am hrs
Underscoring the benefits of diversifying foreign exchange reserves and the uniqueness of gold component as part of the forex basket , SS Tarapore, former deputy governor, Reserve Bank of India and economist, has strongly advocated for increasing the proportion of gold in the countrys forex reserve. He was speaking at a conference on Foreign Exchange Management: The Way Forward, on Tuesday.

In the past, countrys forex reserves have jumped significantly but the gold holding in it has now dwindled to as low as 3.6%. If the gold proportion of the RBIs forex reserves were cautiously raised, to say 10% of total reserves, it would require an additional purchase of gold by the RBI of $10 to 11 billion, he said.

But, while speaking to reporters, he declined to specify a certain percentage. Maintaining that the time was ripe for shedding the phantom fears on the gold transactions of the RBI, he said that buying gold should not be a taboo and selling RBI gold should not be a talk of shame.

Gold is unique, in the sense it is both a commodity and a store of value. More importantly, gold invariably moves inversely with the US dollar and also rises in value when international inflation gathers momentum. Thus, there are strong reasons for holding a reasonable proportion of Indian foreign reserve exchange reserves in gold, Tarapore added.

He further explained that RBIs inability to cash in on favourable trends in gold emanated from unfounded fears of the Indian polity. Before the RBI moves over to an active gold policy the fears of gold in the polity have to be removed, he said.

Tarapore also said there should be a discussion paper prepared on gold, which should put out in fairly simple terms the costs of the present passive policy and what a proactive gold policy would deliver if the RBI were to undertake two way transactions in gold. He also cautioned against any transfer of ownership related to cash transaction from the Reserve Bank of India (RBI) to the government. Transfer of ownership from RBI to government in all-cash transaction is a dangerous precedent, he said.

On the question of the FCACs recommendation of formation of new banks by large corporate houses he said, we need well capitalised banks which large corporates can do.