NewsWire18, Tuesday, Nov 3 . By Shruti Ramchandran MUMBAI - The Reserve Bank of India buying gold from the International Monetary Fund last month may mean the central bank will continue hunting for the yellow metal, albeit more passively, currency dealers and treasury officials said. But, the central bank will not change its current stance of buying or selling foreign exchange just to even out lumpiness in demand or supply, they said. Surge in foreign currency assets will be incidental should the RBI absorb the capital inflow, dealers said. But in the mix of assets, the central bank could ensure the weight of gold would rise, dealers said. RBI's foreign exchange reserves are split into foreign currency assets--cash, deposits, or investment in other governments' bonds--gold reserves, special drawing rights, and lending to the International Monetary Fund. The RBI bought 200 tn of gold between Oct 19 and Oct 30 from the International Monetary Fund under a limited gold sales programme, the RBI said in a release today. "This was done as part of the Reserve Bank's foreign exchange reserves management operations," it said. On Sep 19, the IMF had decided to sell 403.3 tn of gold to increase its resources for lending to low-income countries. RBI's purchases--about 50% of the IMF's gold on offer--cost $6.7 bln or 4.2 bln Special Drawing Rights. As on Oct 23, the RBI's gold holding was 3.6% of the total reserves. But on Oct 30, data for which will be released Friday, the proportion will show a rise. The RBI's holding of gold--in value terms--has risen to $10.316 bln as on Oct 23 from $9.58 bln as on Mar 31 and $8.56 bln from a year earlier. Welcoming RBI's purchases from the IMF, Finance Minister Pranab Mukherjee today said the RBI was likely to continue buying gold. Currency traders said although the RBI's purchases had been dramatic last month, they essentially follow the purchases made by other central banks from the markets. "Other central banks have also been increasing their proportion of gold in the reserves over a period of time. So RBI has also taken the policy to increase gold in the reserves as its holdings in reserves is low," said S. Rajendran, General Manager Treasury, Union Bank of India. Most central banks have been steadily shoring up their gold holdings to hedge against the falling value of the dollar. The deep recession in the US, financial crisis, and record low interest rates has taken a toll on the dollar and the dollar-denominated assets. In fact, several countries, including China, Saudi Arabia, and Russia spoke about the need to replace dollar as the reserve currency. Earlier today, the euro appreciated against the US dollar due to RBI's purchase of gold as traders dumped the greenback on views that there may a dip in the dollar holdings of Asian central banks. But, the dollar/rupee market, however, seemed unfazed by RBI's decision to buy the yellow metal. In fact, the rupee depreciated 0.95% against the US dollar today to close at 47.40 rupees/$1. "The purchases were done directly between the RBI and the IMF. So there was no impact on the dollar/rupee market. Besides the amount that was purchased was a small part of the reserves," said a dealer with a large UK bank. The steep fall in the local stock market had a deeper impact on the rupee today, dealers said. RBI's gold purchases could impact the dollar/rupee pair if the central bank funds its purchases from the market. But if it is funding its purchases from its cash or other foreign currency assets, then the currency pair won't be impacted, said chief dealer with a private bank. Currency market players said increasing the proportion of the yellow metal in the reserve may offset the impact of the weakening dollar on the central bank's foreign exchange rates. The move essentially diversifies the central bank's holdings. "It is more to do with the diversification of foreign exchange reserves. Global central banks across the globe have shown their intention to diversify in terms of gold reserve. I think (it) is also good hedge against dollar weakness," said Hemant Mishr, managing director, head - global markets, India, Standard Chartered Bank. Optimal management of foreign exchange reserves being one of the aims of the central bank, it must have increased its gold reserves to earn a higher yield, currency market players said. "The interest rate in US is at an all-time low so there was not much return from the dollar over the past one year. With gold prices going up, the yield that will be earned on it is higher," said J. Moses Harding, head-global markets group, IndusInd Bank. Safety and security being the priority, the yellow metal may slowly and steadily shine in RBI's reserve kitty. End . With inputs from Kumud Sinha . Edited by Sandeep Deshmukh . NewsWire18 Tel +91 (22) 6637-8700 Send comments to feedback@newswire18.com . Copyright NewsWire18 Pvt. Ltd. 2007. All rights reserved. Category : E/INT G/RBI G/MUL M/FRX M/MAR M/TOP R/ASI R/IN R/SHA