Gold at five-year low could drag value of RBI holdings by 32%

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Mumbai | Published: July 24, 2015 12:23:44 AM

At the current price of gold, the value of the RBI gold reserves could be $19.5 billion. This would be sharply lower than valuation peak of $28.66 billion

GOLD’S freefall to a five-year low could erode the value of RBI’s gold holdings by 32% from a valuation peak of $28.66 billion in October 2011 when the yellow metal touched an all-time high.

The central bank holds 557.75 metric tonne of gold as part of its overall foreign exchange reserves. At the current price of gold, the value of the central bank’s gold reserves could be $19.5 billion. The RBI releases its forex reserves data every week.

For central banks across the world, gold is a critical part of foreign exchange reserves. The yellow metal is seen as a stable reserve at times of crisis when the exchange rate volatility could impact valuation of foreign currency reserves in a big way. Indeed, during the balance of payment crisis in 1991, India had to pledge gold to European central banks to build forex reserves.

Currently, India’s forex reserves are at an all-time high around $355 billion.

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But should the fall of its gold reserve valuation worry the RBI? With respect to reserves, it need not concern the central bank as the valuation has been largely stable over the last two years. Further, gold’s share in the total reserves has fallen to about 5% from as high as 9.6% in 2012.

However, the probability of a major jump in consumption and, consequently, a renewed pressure on the current account should be a cause for concern. Given that demand for gold from Indians is both traditional and investment driven in nature, gold imports have not slowed down even during the yellow metal’s all-time high price.

Latest data show that in January-March, gold imports rose 60% to $8.54 billion compared with the corresponding quarter of the previous year. For the full 2014-15 fiscal year, gold imports totalled $34.43 billion, up from $28.81 billion in 2013-14.

However, some analysts feel that a renewed consumption demand owing to the sharp price fall in unlikely. “Despite the recent decline in gold prices, we do not expect increased consumer demand to add pressure to India’s current account deficit or INR,” said Nomura Securities in a report on Thursday.

Further, Nomura Securities estimates that import volume of gold dropped 21% month-on-month in June.

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