RBI buys 200 mt gold from IMF to pump up reserves' value

MUMBAI: The purchase of 200 tonnes of gold from
 the International Monetary Fund (IMF) by the Reserve
Bank of India will not just diversify the
country’s foreign exchange reserves but also boost
of the value of the reserves.

On Tuesday, RBI announced that it had concluded
the purchase of 200 metric tonne of gold from the
International Monetary Fund (IMF), under the Fund’s
 limited gold sales programme. The central bank said
 that it was an official sector off-market transaction
and was executed over a two-week period during
October 19-30, 2009 at market-based prices.

Gold prices have been moving up faster than the majo
r global currencies — which is expected to boost the
value of the country’s foreign exchange reserves.

This is the first time that the Reserve Bank has bought
 such a large amount of gold globally. Interestingly,
the market import of gold has dipped sharply this year
on account of high international prices and low demand.
 Years ago, confiscated smuggled gold used to be assigned to RBI vaults.

However, with the opening up of the economy,
gold smuggling has virtually stopped. For many
year’s the central bank gold holdings remained
constant at about 11.5 million troy ounce accounting
 for 4% its reserves worth $285 billion now.

The recent purchase of close to 6.5 million troy ounce
would raise the share of gold in India’s foreign exchange
 reserves to about 6%. The gold is valued at the month end
closing price on the London bullion exchange.

With international gold prices touching a new high every
day, this part of the reserves has seen a sharp appreciation.
In the month of September, reserves rose $485 million only
on account of the rise in valuation of gold in reserves.

In its official release, IMF has said that the total sales
proceeds are equivalent to US$ 6.7 billion or SDR 4.2 billion.
MD Dominique Strauss-Kahn indicated that the proceeds from
 the gold sale will help the Fund, step up much-needed
concessional lending to the poorest countries.

As for the central bank, there is no official communication
 either being the intent of such a move or its plans for the
purchased gold. But experts say the move could help the
 central bank diversify its reserves and would not have
a significant impact on the overall foreign exchange
 reserves position, said a former top RBI official.

This is because these purchases are reckoned to be
 carried out from the $4.8 billion worth SDR allocation
that the RBI had obtained from the Fund earlier this year.
The IMF had allocated $4.8 billion by way of general
allocation of special drawing rights (SDR) — the reserve
currency with the IMF — in August this year as part of its
SDR 161.2 billion package allocated to member countries.

The value of SDR is a weighted average of a basket of
 currencies which includes the US dollar,
the Sterling pound, the yen and the euro.
The weightage to each currency which is revised
 at regular intervals depends on their prevailing
relative importance in the global markets.