Should India hike its gold reserves?

Should India increase its gold reserves to further fuel the booming economy? This is one question that the Reserve Bank of India is debating these days. Globally, India is ranked sixth in the top-ten list of the gold and currency reserves. The first three positions are being held by Japan, Russia and China. China has state currency reserves with over $940 billion, while Japan has $871.9 billion currency reserves.

Russia is in the third position with $265.6 billion. Taiwan occupies the fourth position with $260.4 billion reserves, while South Korea is placed fifth with $225.7 billion reserves, followed by India with $164 billion and Singapore with $128.7 billion. Hong Kong, Germany and France wrap up the list of ten leaders. These days, speculation is rife on whether India should hike the proportion of gold in the country's foreign exchange reserves.

In the last few years, the foreign exchange reserves in India have risen significantly while gold reserves have remained static. Today, the proportion of gold in forex reserves has come down to a pitiful low of 3.6 per cent. The foreign exchange reserves in India are invested in multi-currency, multi-asset portfolios.

According to official data, in March 2006, out of the total foreign currency assets of $145.1 billion, $35.2 billion was invested in securities, $65.4 billion was deposited with other central banks — BIS & IMF — and $44.5 billion was in the form of deposits with foreign commercial banks.

According to former Reserve Bank of India deputy governor S S Tarapore gold as a reserve asset has a longer and more enduring history than flat money, and thus deserved a better representation in the country's forex reserves. He has argued that it is time India increased the gold reserves in tune with the booming economy. But this is not a decision which the government would find easy to take.

For instance, if the gold proportion of the forex reserves is raised to 10% of total reserves, it would require a forex outgo to the tune of about $15 billion at current prices. Moreover, if India hikes the gold reserves, it could also affect the bullion market in a big way.

But officials in the finance ministry said discussions are on between the Reserve Bank experts and key officers of the Prime Minister's Office to decide whether it is prudent for India to hike the gold reserves. In fact, several central banks like in China and Russia are now considering increase in their reserves.