India looking at leasing gold bought from IMF

In what appears at first glance a throwback to 1991, India will consider leasing out the 200 tonnes of gold it bought from the International Monetary Fund (IMF) in 2009.

The gold will be leased in the international market for dollars so as to shore up the sagging rupee, which plunged below Rs 64 against the US dollar in Tuesday’s trade.

A final decision may be taken next month, Finance Ministry sources said.

The move can fetch around $23 billion, David Gornall, Chairman of the London Bullion Market Association, has estimated.

This marks a tidy increase in the Reserve Bank of India’s investment. In November 2009, the RBI purchased 200 tonnes of gold from the IMF, under the Fund’s limited gold sales programme, for $6.7 billion, cash.

BOOK TRANSFER

According to RBI sources, this gold was never brought into the country. It was just a book transfer.

Speaking at the India International Gold Convention in Jaipur last week, Gornall had said the RBI can organise a gold-dollar swap without divesting its holding or incurring any further interest charges.

“By swapping gold for a payable currency, you can benefit by having access to dollars for a period of your choice, while remaining a long-term holder of the gold, as the swap is a transfer of asset for a limited period. You will have bullion bank counter-party risk but this is successfully managed at the RBI, which has the strictest lending criteria of any central bank in the world,” Gornall had argued.

Finance Ministry officials agree.

LIQUID ASSET

Talking about the leasing arrangement, a Ministry official said that since gold was the most liquid of assets, it can be readily leased, and returned by the lessee to the lessor any time.

Further, a lease transaction means the RBI’s gold holding will not come down even as it unlocks the asset’s value.

LESSONS FROM 1991

Government sources said leasing the gold did not imply a return to the 1991 situation, when a looming balance of payments crisis had forced the government to pledge its gold reserves with the IMF to secure a line of credit to pay for imports.

Currently, India has foreign exchange res
erves of around $278 billion, sufficient to fund the import bill for over six months.

CHEER FOR GOLD TRADE

The lease move will also cheer the gold trade.

The world market for gold is heavily impacted by demand from India, world’s largest market for the yellow metal.

The global gold industry has been worried that the Government will impose a blanket ban or place severe cubs on imports leading to a turmoil in the world markets.