The Hindu Business Line : `Have more gold in forex reserves'

The proportion of gold in the country's foreign exchange reserves should increase, suggested Mr S.S. Tarapore, former Deputy Governor of the Reserve Bank of India and Chairman of the Committee on Fuller Capital Account Convertibility.

Gold as a reserve asset has a longer and more enduring history than flat money, he said.

With the significant rise in the forex reserves and a stagnant holding of gold (in quantity terms), the proportion of gold in forex reserves has now dwindled to as low as 3.6 per cent, said Mr Tarapore. "With reserve currencies limited to the US dollar, the euro, the yen and the sterling, the possibilities of diversification are very limited."

If the gold proportion of the forex reserves were cautiously raised to, say 10 per cent of total reserves, it would require an additional purchase of gold by the RBI of $10-11 billion, he said. There are concerns that the price of gold The gold proportion would be a bedrock which would not be used in the early stages of any drawdown of reserves , he said.

Indian polity

But the Indian polity has to change its perception of gold. While the public loves gold, the polity fears it, and this explains the RBI's inability to cash in on favourable trends in gold, he noted.

"Buying gold by the RBI should not be taboo and selling gold should be no shame," he said. He also suggested a discussion paper on gold to show what a proactive gold policy would deliver if the RBI were to undertake two-way transactions in gold.

In the more recent years, he said, Russia, China, Japan, East Asian and West Asian countries have been gradually increasing the share of gold in their reserves, he said. "The major industrial countries continue to hold a significant proportion of their forex reserves in gold."

He also reiterated the recommendation of the Tarapore committee with regard to quick implementation of introduction of Gold Exchange Traded funds.