The Hindu Business Line : Managing gold

THE Reserve Bank of India (RBI) has made a comprehensive review of the operational matters relating to management of reserves. Put out in the RBI bulletin of March, this has been done to bring about transparency of its approach, and relates to the positions as of September 30, 2003; the central bank will release two reports every year, vis-à-vis positions at end March and September.

Indeed for this RBI needs to be complimented; the central bank has emerged an important player in this area. The report, representing a valuable database, is expected to generate informed debate on such crucial aspects as the level and deployment of reserves, and the exchange rate, all of which have a vital bearing on the economy.

India has come a long way since the onset of economic reforms triggered by serious difficulties on the external front. Foreign exchange reserves have grown significantly since 1991 reaching $100 billion.By all conventional norms — import cover, ratio to short-term debt, and capital flows — the reserves can be considered comfortable. These reserves are invested in across currencies, and markets. If safety and liquidity constitute the key objectives of reserve management in India, return optimisation is an embedded strategy; in 2002-03 (July-June) the return on foreign currency assets dropped to 2.8 per cent from 4.1 per cent during 2001-02 mainly because of lower international interest rates.

The RBI bulletin, while discussing the various risks arising out of the deployment of reserves and the measures used employed to manage them.

One aspect relates to gold. The RBI holds about 357 tonnes of the yellow metal, forming 4.3 per cent of total foreign exchange reserves as on September 30, 2003. Of these, 65 tonnes are being held abroad since 1991 in deposits with Bank of England and the Bank of International Settlement. The average return on these deposits, which are of a short-term nature, was around 0.6 per cent during the financial year 2002-2003 compared to 0.9 per cent in the previous year.

The 65 tonnes kept abroad accounts for about 18 per cent of total gold holding of the RBI. But as per Section 33(5) of the RBI Act of 1934, not less than seventeen-twentieth shall be held in India and all gold bullion and gold coin and sold as assets shall be held in the custody of the RBI or its agency.

According to the RBI Annual Report 1991, in September-November 1991, the RBI pledged the gold with the Bank of England to raise loans, and redeemed it after repaying the loans. Earlier, in May 1991, the Government had leased 19.99 tonnes out of its stock of confiscated gold to the State Bank of India, which, in turn, sold in the international market 18.36 tonnes with a repurchase option. SBI repurchased the gold in November-December 1991. Subsequently, the 18.36 tonnes of gold was sold by the Government to the RBI. The balance of 1.63 tonnes of gold has since been returned by the SBI to the Government. The gold involved in both the transactions, adding up to 65.27 tonnes, was kept abroad for the time being, as per RBI Annual Report 1991.

Three points emerge out of this: First, the 65.27 tonnes kept abroad out of 350 tonnes exceed 15 per cent of the RBI's total gold holding. Second, this was supposed to be a temporary arrangement. But why is it still being held abroad? It makes sense if it is earning some returns. Lastly, does the Bank of England enjoy any special status as the RBI's operations are still governed by the RBI Act of 1934? Various central banks are actively engaged in gold operations. But what is the RBI's perception on this vital aspect? The RBI bulletin devotes one paragraph to gold. Hopefully the next report will contain more information to clarify these points.

(The author is with the Reserve Bank of India, and the views are personal. She can be contacted at pitre_v@hotmail.com)

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