The purchase of 200 tonnes of gold by the Reserve Bank of India (RBI) from the International Monetary Fund (IMF) for $6.7 billion has evoked a rather sentimental response in this country. The memory of the 67 tonnes of gold that was pledged to the Bank of England in 1991 as India struggled to find its way out of a severe balance-of-payments crisis still rankles. Almost 19 years later, the country’s ability to buy three times that amount with barely a ripple being caused in its $285-billion foreign exchange reserves is a huge vindication of all the things that various governments have over the years done to reinforce and consolidate on the reform process that was initiated in the aftermath of the 1991 crisis. Well, perhaps a little bit of sentimentality is appropriate, but this is also an opportunity to look back over the past two decades and reflect on whether the reform process delivered on its promises. There is little doubt about the massive improvement in the macroeconomic situation — acceleration in growth, the virtual elimination of balance-of-payments problems and, as recent events demonstrated, a good deal of resilience. But, there is far less comfort on microeconomic issues — infrastructure, employment, education, health, the condition of cities, social security… the list could go on. Gold may have come full circle, but the process that is synchronous with its first movement is far from complete.
From a more practical perspective, however, the transaction has a number of implications for both the IMF and RBI. The former has emerged as a significant beneficiary of the G-20 crisis-management process that began a few months ago. It will be entrusted with the role of helping weaker economies create adequate buffers against a potential global crisis and, to this end, requires a significant enhancement of its resources. Its board had approved a gold sale totalling over 400 tonnes to help achieve this, and the sale to India is part of that plan. For RBI, the purchase is an opportunity to achieve some diversification, albeit a relatively small one, of its international assets, which are heavily skewed towards foreign currencies, without causing any disruption in foreign exchange markets. Since gold prices and the US dollar are almost perfectly inversely correlated, the diversification provides a hedge against a depreciating dollar. Further, the gold reserve also provides RBI with an additional instrument to mop up liquidity as it begins to deal with inflationary pressures going into next year. Given the Indian appetite for the yellow metal (it is the world’s largest consumer), gold sales by RBI to the public will find ready buyers, taking the corresponding amount of money out of circulation. Of course, whether this instrument is ever used remains to be seen. Meanwhile, the bigger issue of infusing new energy into the reform process that began with the outflow of gold in 1991 needs to be urgently addressed.
