Thursday, April 18, 2013

Tumbling global gold price eats into RBI’s forex reserves


On Wednesday, the gold price rose 1.32% to $1,386 per ounce. At this price, RBI’s gold reserves are valued at $24.85 billion, down 27.08% from its September 2011 peak. Photo: Bloomberg
On Wednesday, the gold price rose 1.32% to $1,386 per ounce. At this price, RBI’s gold reserves are valued at $24.85 billion, down 27.08% from its September 2011 peak. Photo: Bloomberg



livemint :Dinesh Unnikrishnan    : Wed, Apr 17 2013. 11 58 PM IST

Value of RBI’s gold reserves has declined from $34.08 bn in September 2011 to $24.17 bn early this week


Mumbai: The value of gold reserves with the Reserve Bank of India (RBI) has dropped 29% after international gold prices crashed last week following speculation that Cyprus may sell its gold reserves to rein in its ballooning fiscal deficit.
The value of RBI’s gold reserves—557.75 tonnes—declined from $34.08 billion (around Rs.1.84 trillion today) in September 2011, when the international gold price peaked at $1,900.23 per ounce (28.35 gram), to $24.17 billion early this week, when the yellow metal tumbled to its 26-month low of $1,347.95 per ounce.
Economists and analysts are playing down the impact of this on the Indian central bank’s reserves as the decline in value is notional. In fact, RBI has made substantial gains from the acquisition of gold reserves in the last one decade, they said.
“Looking at the average cost of acquisition of RBI’s gold holdings, gold has brought significant gains to it as the prices have gone up in the last decade. The current loss is only notional,” said Gaurav Kapur, India economist at Royal Bank of Scotland NV.
On Wednesday, the gold price rose 1.32% to $1,386 per ounce. At this price, RBI’s gold reserves are valued at $24.85 billion, down 27.08% from its September 2011 peak.
Last week, the European Commission said Cyprus may have to sell gold worth about €400 million (Rs.2,840 crore) to rein in its fiscal deficit. If the 13.9 tonnes sale takes place, this will arguably be the largest such disposal by a euro zone central bank since France sold 17.4 tonnes in the first half of 2009.
Gold as a percentage of RBI’s total reserves has been declining since the mid-1990s. It constituted 20% of the reserves in 1994, but dropped to 2.98.% by end-September 2008. RBI then bought 200 tonnes of gold from the International Monetary Fund (IMF) in November 2009, following which the share of the metal in the total reserves rose above 8%.
The 2009 gold purchase from IMF was seen as part of efforts by global central banks such as those of China, Russia, India and some European Union nations to shore up gold reserves and safeguard the reserve position of their economies in the event of a financial crisis. The objective was also to diversify assets.
Traditionally, RBI values its gold reserves at the end of the month at 90% of the daily average price quoted on the London Metal Exchange.
Apart from gold, RBI’s foreign exchange (forex) reserves include foreign currency assets, special drawing rights, and reserves held with IMF. Foreign currency assets consist of sovereign bonds, mainly US treasury bills. Buying more gold will help the Indian central bank diversify its assets. RBI’s gold holdings include the acquisition of gold worth $191 million from the government in 1991-92, $29.4 million in 1992-93, $139.3 million in 1993-94, $315 million in 1994-95 and $17.9 million in 1995-96.
On the other hand, the Indian government has been buying back gold from RBI to meet its own repayment needs. For instance, the government bought back 1.27 tonnes of gold in 1997 and 38.96 tonnes in 1998 from RBI to meet redemption obligations under a gold bond scheme.
Globally, central banks are among the biggest losers in the latest price crash as they own 31,694.8 tonnes, or 19%, of all the gold mined, according to the World Gold Council (WGC) in London. Sliding gold prices have eroded $560 billion from the value of central bank reserves, Bloomberg reported on Wednesday.
Around $773 billion was wiped from the value of all gold holdings globally on 15 April, taking them to around $7.5 trillion from $8.3 trillion last week, based on futures and a 2011 estimate by WGC that 171,300 tonnes of the metal have been mined.
The amount erased is greater than the market capitalization of all the stocks trading in Singapore, according to data compiled by Bloomberg.
In 1991, the Indian central bank had to pledge 67 tonnes of gold to Union Bank of Switzerland and the Bank of England to raise $605 million to shore up its dwindling forex reserves, when the country faced its worst ever balance of payments crisis. India’s forex reserves had declined to a mere $1.2 billion in January 1991. Currently, India’s forex reserves are at $293 billion

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