The Reserve Bank of India’s (RBI) purchase of 200 tonne of gold from the International Monetary Fund (IMF) has created quite a stir in the bullion and currency markets around the world. Is this a one off transaction or is the RBI looking to diversify its foreign exchange holdings?

Commenting on the gold purchase, Finance Minister Pranab Mukherjee says too much emphasis should not be put on the event. He also advises the RBI Governor to keep in view the availability of foreign exchange reserves for further purchase of the precious metal.

Bart Melek of BMO Capital Markets believes that many other central banks might follow suit. “There is a bet going in the market that central banks would be buyers of last resort for any potential sales from the IMF or anywhere else for that matter.”

Melek says for quite some time the market was worried that the IMF sales were going to flood the market and could force prices lower. “But with this India purchase, this is pretty much off the table and it certainly makes us believe that other central banks are waiting in the wings as well to buy up the remaining 200 tonnes of IMF gold.”

In an interview with CNBC-TV18, Madan Sabnavis Chief Economist at NCDEX and Jamal Mecklai CEO of Mecklai Financial spoke about RBI’s latest purchase and what it means for the country’s economy.

Below is a verbatim transcript:

Q: What do you make of this action?

Sabnavis: We should be looking at this particular issue of sale of gold by IMF as a one-shot sale. So we are actually talking of 400 tonnes of gold being sold of which the RBI has picked up 200 tonnes. I don’t expect this to be replicated in future by the IMF or even other governments for that matter.  

Q: Would you agree with that?

Mecklai: People are seeing too much into it. Basically, the IMF needed money – they sold gold. Why has India stepped up to the plate? There is lot of talk that this is closing the circle from 1991 – we are ahead of China. Read the global media, people are very excited and impressed by this. I don’t really think it is that big a deal. This is of course some diversification of reserves – It’s about 2.5%, which is not a bad amount. But people are seeing too much into it.

I think markets are markets. What is really going on right now is that the whole world is still in a situation of huge uncertainty. Everybody wants to reduce their risk and so the RBI is doing the same.

Q: Don’t you agree with the point that Jamal is making that this is a diversification of the foreign exchange portfolio that is otherwise a dollar dominated portfolio, so this should serve as a good hedge actually?

Sabnavis: Yes, there is definitely a case of saying that gold and dollar are substitutes for one and another and incase the dollar depreciates, which one expects that the dollar too in future, then the price of gold should go up. So, it does make a lot of sense for central banks to diversify their portfolio and have a good blend of gold and dollars. But the broader issue out here is that why is it that the RBI didn’t do this earlier if they really believe in diversifying their portfolio because we have been having these excess forex reserves – close to USD 300 million – for quite some time not just this year but even earlier but we never really thought of diversifying and we all knew that the dollar was weak and shaky.

I don’t really think that this is a concerted policy of the RBI to go in for diversification. They probably just saw that there is a sale of 400 tonnes of gold – let us pick up 200 tonnes and maybe we get back at IMF because if you remember, 1991 when all of us were there, we saw that it was a fairly humbling turf of actually pledging your gold and getting hold of a loan and then going to the IMF – getting into this whole business of economic reforms. So this could be in a very lighter manner because say its payback time for the IMF.