Now India is talking about diversifying forex into gold

Tarapore for Increasing
Gold Component
in Forex Reserves

From The Indian Express / Financial Express, Mumbai
Wednesday, November 29, 2006

http://www.financialexpress.com/fe_full_story.php?content_id=147578

MUMBAI, Nov. 28 -- Underscoring the benefits of diversifying foreign exchange reserves and the uniqueness of a gold component as part of the forex basket, S.S. Tarapore, former deputy governor of the Reserve Bank of India and an economist, has strongly advocated for increasing the proportion of gold in the country’s forex reserve. He was speaking at a conference, "Foreign Exchange Management: The Way Forward," on Tuesday.

In the past, country's forex reserves have jumped significantly but the gold holding in it has now dwindled to as low as 3.6 percent. "If the gold proportion of the RBI's forex reserves were cautiously raised, to, say, 10 percent of total reserves, it would require an additional purchase of gold by the RBI of $10-$11 billion," he said.

But while speaking to reporters he declined to specify a certain percentage. Maintaining that the time was ripe for shedding the "phantom fears" of the gold transactions of the RBI, he said that buying gold "should not be a taboo" and selling RBI gold should not be a "talk of shame."

"Gold is unique, in the sense it is both a commodity and a store of value. More importantly, gold invariably moves inversely with the US dollar and rises in value when international inflation gathers momentum. Thus there are strong reasons for holding a reasonable proportion of Indian foreign reserve exchange reserves in gold," Tarapore added.

He further explained that the RBI's inability to cash in on favourable trends in gold emanated from unfounded fears of the Indian polity. "Before the RBI moves over to an active gold policy, the fears of gold in the polity have to be removed," he said.

Tarapore also said there should be a discussion paper prepared on gold that should put out in fairly simple terms the costs of the present passive policy and what a proactive gold policy would deliver if the RBI were to undertake two-way transactions in gold. He also cautioned against any transfer of ownership related to cash transactions from the Reserve Bank of India to the government. "Transfer of ownership from the RBI to government in all-cash transactions is a dangerous precedent," he said.

On the question of the FCAC's recommendation of formation of new banks by large corporate houses he said, "we need well-capitalised banks which large corporates can do."

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