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But with the US dollar showing distinct signs of weakness (not surprising, given its weak macroeconomic fundamentals) and set to weaken further, it makes eminent sense to shift from a dollar-centric reserve basket to a more diversified one, long-term.
Many countries have been doing a subtle re-balancing of their reserves for years; partly to insulate their reserves from dollar weakness and partly in preparation of the day when the dollar will no longer be the international reserve currency. Yes, the latter does seem a long way off at the moment and one could argue that gold is a poor alternative. The RBI should, instead, be buying other currencies like, say, the euro or maybe even the Chinese yuan.
But gold remains an important asset class. Back in 1991, when our forex reserves were down to little over one billion dollars, it was the RBI's hoard of gold that came to our rescue. We were able to pledge it with the Bank of England and the Bank of Switzerland to give us the much-needed breather.
Today, with reserves of $285 billion, and likely to grow as dollar inflows resume, the purchase, entailing a payout of little less than $7 billion, is too insignificant an amount for anyone to lose sleep over it, except for its symbolic value. And that symbolic value would be to further feed the gold frenzy that has Indians in a perpetual grip. Total central bank holdings of gold is around 30,000 tonnes, the same level as 60 years ago, over which period world output has grown some 13 times. The relative decline of gold in the affairs of the world, we hope, will have some influence on Indians' collective craving for gold.
To see more of The Economic Times, or to subscribe to the newspaper, go to http://economictimes.indiatimes.com Copyright (c) 2009, The Economic Times, India Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
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