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India buys 200 tonnes of gold from IMF

NEW DELHI — One of the defining moments of the crisis of 1991 was the decision to mortgage 67 tons of gold abroad as security for a forex loan. The loan had become necessary because India faced dwindling foreign exchange reserves and a possibility of a default on payments.

The decision to move gold out of India was described as a national humiliation. But the late Prime Minister Chandra Shekhar, who was aware that his political opponents would exploit it to the hilt, showed tremendous courage in endorsing this proposal. The government hocked 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise $ 600 million. The move helped tide over the balance of payment crisis, and also kick-started the reforms process when the next Prime Minister, Narasimha Rao, appointed Dr Manmohan Singh as the finance minister.

After eighteen years, the Reserve Bank of India (RBI) has bought thrice the amount of mortgaged gold from the International Monetary Fund (IMF) to diversify its assets.

The IMF announced on Monday the sale of 200 metric tons of gold (or 12,965,649 fine troy ounces) to the Central bank. This amount represents almost half of the total sales volume of 403.3 metric tons that was approved by the Executive Board in September.

“I strongly welcome this transaction with the Reserve Bank of India,” Managing Director Dominique Strauss-Kahn stated.

“This transaction is an important step toward achieving the objectives of the IMF’s limited gold sales program, which are to help put the Fund’s finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries,” he said

The transaction involved daily sales that were phased over a two week period during October 19-30, 2009, with each daily sale conducted at a price set on the basis of market prices prevailing that day.

The total sales proceeds are equivalent to US$ 6.7 billion (Rs 31,490 crore).

“The purchase was done as part of the foreign exchange reserves management operations,” the RBI said in a press release on Tuesday.

India is the world’s largest private gold consumer, but the government’s holding of gold as an asset is modest. According to the World Gold Council’s latest report, the RBI has become the 11th largest gold holder among various central banks, placing it ahead of the European Central Bank but behind Russia’s.

Of the total foreign exchange reserves of $286 billion as on October 23, the RBI holds gold valued at $10 billion. Foreign currency assets account for more than 90% ($268.3 billion) of the total reserve.