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Determinants of Gold Demand in Reserve Bank of India's foreign exchange reserve portfolio

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  • Amit Ghosh

    (Illinois Wesleyan University)

Abstract

Although a sizeable body of literature has studied the safe haven, inflation- and US dollar-hedge, flight-to-quality properties of gold using high-frequency gold price data, very few studies have examined the determinants of official gold holdings by central banks. This bulletin examines this for the Reserve Bank of India by using monthly data from 1995 to 2016. Employing both frequentist instrumental variable and Bayesian model averaging techniques, I find gold's US dollar and inflation-hedge properties as well as higher exchange rate risk to significantly increase RBI's gold holdings while higher equity market risks, term premium and lower market capitalization reduce such share. The results imply the rationale for holding gold by India's central bank is actually not different from private hedge fund managers or individual investors.

Suggested Citation

  • Amit Ghosh, 2016. "Determinants of Gold Demand in Reserve Bank of India's foreign exchange reserve portfolio," Economics Bulletin, AccessEcon, issue 4, pages 1929-1937.
    • Handle: RePEc:ebl:ecbull:eb-16-00570
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    File URL: http://www.accessecon.com/Pubs/EB/2016/Volume36/EB-16-V36-I4-P188.pdf
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    References listed on IDEAS

    as
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    3. Ciner, Cetin & Gurdgiev, Constantin & Lucey, Brian M., 2013. "Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 202-211.
    4. Capie, Forrest & Mills, Terence C. & Wood, Geoffrey, 2005. "Gold as a hedge against the dollar," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(4), pages 343-352, October.
    5. Mark, Joy, 2011. "Gold and the US dollar: Hedge or haven?," Finance Research Letters, Elsevier, vol. 8(3), pages 120-131, September.
    6. Jukka Pihlman & Han van der Hoorn, 2010. "Procyclicality in Central Bank Reserve Management: Evidence from the Crisis," IMF Working Papers 2010/150, International Monetary Fund.
    7. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2007. "Enhanced routines for instrumental variables/generalized method of moments estimation and testing," Stata Journal, StataCorp LP, vol. 7(4), pages 465-506, December.
    8. Batten, Jonathan A. & Ciner, Cetin & Lucey, Brian M, 2014. "On the economic determinants of the gold–inflation relation," Resources Policy, Elsevier, vol. 41(C), pages 101-108.
    9. Srichander Ramaswamy, 2008. "Managing international reserves: how does diversification affect financial costs?," BIS Quarterly Review, Bank for International Settlements, June.
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    Cited by:

    1. Gopalakrishnan, Balagopal & Mohapatra, Sanket, 2018. "Turning over a golden leaf? Global liquidity and emerging market central banks’ demand for gold after the financial crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 94-109.
    2. Rathi, Sawan & Mohapatra, Sanket & Sahay, Arvind, 2021. "Central bank gold reserves and sovereign credit risk," IIMA Working Papers WP 2021-03-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Vyacheslav Dodonov, 2022. "Gold as a Factor of Change in Central Bank Reserves in Periods of the Financial Markets Turbulence: the Case of Kazakhstan," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(2), pages 209-224.
    4. Rathi, Sawan & Mohapatra, Sanket & Sahay, Arvind, 2022. "Central bank gold reserves and sovereign credit risk," Finance Research Letters, Elsevier, vol. 45(C).
    5. Hakan Öztunç & Mehmet Orhan, 2021. "Gold Demand by Central Banks: A Comparative Study of Emerging Market and Advanced Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(9), pages 2687-2698, July.

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    More about this item

    Keywords

    Reserve Bank of India; foreign exchange reserve portfolio; gold's share; instrumental variables; Bayesian model averaging; macro-financial fundamentals.;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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