Wise decision

FIRST EDIT


The purchase of 200 tonnes of gold by the Reserve Bank of India from the International Monetary Fund for $6.7 billion provides a golden contrast to the dire situation in 1991 when the country, with an empty foreign reserves kitty, had to pledge 67 tonnes of gold with the Bank of England to tide over a severe balance-of-payments crisis. With $285 billion in foreign exchange reserves the country is now strong enough to weather serious trade and currency problems and insure itself against major fluctuations. The gold purchase will help the RBI to diversify its reserves. At present most of the reserves are held in foreign currency, mainly the dollar, and the IMF’s Special Drawing Rights. The percentage of gold reserves will go up from 3.6 to 6 per cent and will provide a more stable cushion, though even now the RBI’s holding is much less than that of many other central banks.

The sale is important for the IMF also which has to raise funds for lending to poor countries in accordance with the G20 crisis management programme. Another 200 tonnes are up for sale which will probably be bought by China. It is the active purchase of gold by many countries in the international market that pushed gold prices up recently. One message from the heightened activity in the gold market and the IMF-India transaction is that central banks are looking for alternatives to the dollar as a reserve currency. The position of the dollar may not be threatened in the immediate future but the weakening of the currency as a result of the huge US fiscal deficit has introduced a note of caution. Gold prices rose against the weakening dollar and though it has somewhat stabilised now the trend is likely to resume. Therefore gold is looked upon as the best store of value, though the world has moved away from the gold standard since long.

The gold reserves will also help the RBI internally in the fight against inflation. After ruling negative for a few  months, inflation is poised to rise in the coming months. Along with interest rates and other fiscal tools, the gold at the RBI’s disposal can also be deployed to check inflation. It  can be sold in the domestic market to absorb money. So the purchase is not only a testimony to the gains of the economy since 1991 but an investment in future too.

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