The reasoning is that India’s gold reserves as a portion of forex reserves has been extremely low and dominated by the dollar. With the dollar getting further weaker the RBI’s move is seen as a forward looking. Moreover, for existing overseas investors, a strong rupee means better gains while repatriating money. “An outlook of a stronger rupee will always attract more overseas investments and thereby strengthen the currency again,” says a senior executive with a leading overseas investment firm.

However, the current move is seen as a part of the global debate over the strength of the dollar, reckons Andrew Holland, CEO Equities-Ambit Capital and therefore there had some steps to be taken. He says, “It’s a move to hedge against inflation and also against the weakening dollar.”

Madhusudan Kela, CIO of Reliance Mutual Fund sees this as a positive move that would enable the RBI to diversify its asset base. “It is a diversification of asset for the reserve bank and gold is a good source of investment. The dollar weakness, especially against the yen and the euro must have prompted this decision.” The dollar index has weakened against the euro and the yen and the bank has to protect the value of its reserves, he adds. Incidentally, gold has risen 24% this year in London as the Dollar Index, which measures the dollar’s performance against the euro and five other currencies, dropped 6.4%

Overall, central banks are said to be holding 30,000 tonne of gold and India’s proportion of gold holdings as a percentage of foreign currency reserves is around 357.7 tonne or 3.5% of the total foreign exchange holdings. Other countries, especially the developed ones have strong gold reserves. Countries like the US, Germany and France have more than 60% of their foreign exchange reserves held in the yellow metal.

Only developed countries like Japan and UK hold lower gold reserves. Apart from the dollar, India also holds euro and yen in its reserves and there is a small portion of pounds, swiss francs and Canadian and Australian dollars also.

Gold prices have been rising rapidly due to weakening of the dollar. And, now with serious contentions over the future of the dollar, increasing gold holdings is being seen as a prudent move. Ramesh Damani, investment expert and member BSE says that the move by the central bank was a forward looking move and says, , “Gold is getting into a new bull market in coming days. we will also see other countries scramble for buying gold.”

While market experts reckon that the immediate impact on the gold, prices have been strong in the international market. Gold climbed to a record in London and New York on a weaker dollar that boosted the metal’s appeal as an alternative investment and on speculation that central banks may buy more bullion. The Dollar Index slipped as much as 0.4% on Wednesday.

According to Jayant Manglik, president Religare Commoditie, in absence of sustained stability in other assets, a lot of investment globally is moving towards gold. He says, “Since almost all gold is imported and denominated in US dollars, the rupee prices is set to increase in line with international prices. Interestingly, real demand has not fallen in spite of high prices, in fact demand has increased with more Exchange Traded Funds being launched and buying physical gold and the trend is likely to continue globally as well as in India”