Foreign exchange reserves decline $2 bn on fall in gold's value.

MUMBAI: The country's foreign exchange reserves fell by $2 billion during the week ended May 3, as the value of gold in the reserves touched an 18-month low.

The value of gold in the reserves dipped by $1.17 billion to touch $23.97 billion as on May 3; the total reserves are at $ 294.3 billion, according to the latest data released by the Reserve Bank of India. The value of gold has dipped by almost $5 billion since its peak level of $28.7 billion in September 2011.

The central bank values its gold at 90% of the value of the London Bullion Exchange at the end of every month. The gold price dipped 5.7% in April from $1,570 a troy ounce to $1,476.75.

The RBI holds 17.9-million troy ounce of gold in its reserves. Even if one factors in the crash in gold prices in April, the value of the central bank's gold reserves is substantially higher than the returns from other currencies in its reserves. Gold, however, accounts for only about 5% of the total reserves. The balance is in hard currencies such as dollars, sterling pounds, euro and yen.

The RBI, as a part of its reserve management strategy, does not actively trade in its gold like some European central banks. However, gold in the reserves came in handy in 1991, when the RBI pledged its gold with international lenders to raise funds to help the country tide over the balance of payments crisis.

India's foreign exchange reserves have been a cause of concern as the reserves are adequate enough to fund only seven months' imports, against 15 months' imports in May 2008.

The reserves' pile-up depends largely on portfolio inflows, which have not been very reliable as there have been instances of pullout by foreign investors on adverse news either in the local or their home markets.

Soruce : economictimes.indiatimes.com