Saturday, December 08, 2007

Back to gold standard...?

Here is a new insight into our swelling foreign exchange reserves.

The frenetic build-up of forex reserves has lost pace with reserves growing by only $1.2 billion during the week ended November 30 to $273.5 billion. Of the $1.2-billion increase in reserves, $546 million came from an increase in the value of gold. The increase in foreign currency assets was just only $694 million - according to the figures released by the Reserve Bank of India (RBI) in its weekly statistical supplement (WSS).

The RBI has the challenge of maintaining the desired level of liquidity in the market, which it has been through sale of bonds. But this too entails a cost as these bonds need to be serviced at fairly high rates.

Should RBI dump the dollar and switch to good old gold standard, at least a part of its kitty…? If you look at the way the dollar is plunging against global currencies, it makes awesome sense….

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