During the first week of November, a single, all-consuming
news item grabbed the prime time screens of
national TV channels and the editorial columns of
newspapers—the selling of $6.7 bn by the Reserve Bank of India to buy 200
tons of what Keynes termed the "barbaric relic of human
irrationality"—gold.
With the purchase of 200 tons of bullion—which is 50%
of what IMF had originally planned to offload or, 8% of
the world's annual gold mine supply—from the IMF, that
too, when its price is at a record high of $1,080 per ounce, India
has indeed caused an `earthquake' in the bullion market.
Our Finance Minister proudly announced: "We
have money to buy gold. We have enough foreign exchange
reserves." If this statement of him is juxtaposed with his other
observation about the weaknesses of economy
elsewhere—"Europe collapsed and North America collapsed"—one tends to
conclude the transaction as India's attempt to diversify its risk
of holding world's fifth largest global foreign reserves. True,
gold "makes sense as an element that
contributes to the diversification of risk in a
portfolio". But for that to happen meaningfully,
central banks have to necessarily purchase gold in vastly larger quantities. As against
this theoretical requirement, our current acquisition of gold just raises the gold share to
a mere 6% of the current reserves of $281 bn. This means, it hardly makes any dent as
a risk management strategy.
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