Global Crisis and the Demand for Gold in Indian Economy: An Analytical Perspective

Abstract

When India purchased 200 tonnes of gold under the International Monetary Fund's limited gold sales programme, it was interpreted inter alia that it may further inflate the gold price when the price was already ruling high. This motivated us to examine the general trend among the central banks’ demand for gold during recent global financial crisis. In that context,whether India’s purchase of gold was a reserve management strategy or otherwise and whether it affected the gold price trend is examined in this study. In the course of analysis, several related issues such as optimum size of gold in the foreign reserves and rationale of central banks buying gold with special reference to the global crisis are also addressed. The study found that central banks in most of the EMEs and advanced economies had either bought fresh stock of gold or stopped selling their existing stock of gold in the wake of the ‘recent global crisis’. This was strongly supported by economic rationale to hold sizable reserves of gold especially during ‘heightened uncertainty’. India’s purchase did not, apparently, has any impact on the gold price trend and to stock up gold is in line with the global trend.