Why is India buying IMF gold?

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By Surojit Gupta, Anurag Joshi and Ruchira Singh; edited by Kazunori Takada

The International Monetary Fund has sold 200 tonnes of gold to the Reserve Bank of India (RBI) for USD 6.7 billion, quietly executing half of a long-planned bullion sale that has threatened to slow gold's ascent.

The deal will increase India's gold holdings to the tenth largest among central banks.

Why is RBI buying IMF gold?

Analysts say one of the reasons why the RBI was buying gold from the IMF was to shore up its gold holdings.

The latest purchase will lift its share of gold holdings from near 4 percent to about 6 percent, much less than most of the developed world but four times China's share.

India's foreign exchange reserves held at the central bank totalled $285.5 billion on Oct. 23, of which gold comprised just over $10 billion. India held 357.8 tonnes of gold reserves as of March 31, 2009, according to the latest data.

India built up its gold reserves to over 20 percent of its foreign reserves in 1994 after a balance of payments crisis in 1991. But the proportion of gold has since fallen significantly as total reserves swelled.

Another reason behind the buying may be India's push for a larger voting share in the IMF.

India, with other emerging economies, has pressed for greater influence in world economic affairs as it has grown rapidly into a $1.2 trillion economy.

India, along with China, has been pressing for a larger representation in the IMF and had promised to augment its resources for lending to developing countries. By buying gold from the IMF, New Delhi may be trying to assert its authority in the global economic stage.

Is it aimed at diversifying India's reserves?

Some economists say the move could be aimed at diversifying its reserves holdings which focuses on the U.S. dollar.

The RBI does not officially talk about its diversification strategy. On Tuesday, the RBI said the purchase of IMF's gold was done as part of its foreign exchange reserve management.

What does this mean for India's gold market?

The RBI's gold purchase has not had any immediate impact on gold demand as prices are already high and buyers are staying away.

But analysts say the RBI move at the current high price is expected to raise the psychological price level at which Indians buy gold. This would also help raise the demand for gold in the medium term.