MUMBAI, July 14: The gold price crash in the international markets has made a minor dent in the country's foreign exchange reserves, which fell by $8 million for the week ended July 4. The forex kitty has shrunk on account of the revaluation of gold.

The decline has come after months of sustained increase on reserves due to RBI's forex market operations.

Reserves (including gold and SDRs) touched the $29-billion mark. In the last six months, reserves went up from $23 billion to cross $29 billion on June 27.

Gold prices on July 4 crashed to a historic 12-year low at $325 per ounce after the Australian Central Bank decided to sell 167 tonnes of the yellow metal.

As a result, gold reserves which have been steady at $3.954 billion dipped by $ 30 million to touch $ 3.924 billion. Foreign exchange assets, however, continued to grow and during the week ended July 4 it rose by $22 million to $25.40 billion. This reflects the the fact that the Reserve Bank is still mopping up dollars in the forex market.

RBI's periodic interventions in the spot and forward markets have had an impact on the money supply. It went up to 16.8 per cent for the fortnight ended June 20 from 16.6 per cent registered in the previous one.

The gold price crash in the international market has triggered a sharp fall in the Reserve Bank of India's exchange fluctuation reserve (EFR). The central bank is set to register a dip in the FER in its 1996-97 (July-June) balance sheet following the slump in the prices of the yellow metal."The recent fall in international gold prices will erode Reserve Bank's exchange fluctuation reserve to the tune of over Rs 1,000 crore. This is significant since the bank had already booked a loss of over Rs 2,100 crore on India Development Bonds. This happened on account of the exchange risk on the entire $2.1 billion corpus in January-February this year," a senior RBI executive said. Besides, the central bank will also have to bear the exchange risk on the FCNR(A) scheme which will be discontinued with effect from August 15.pThe Reserve Bank books gains/losses on valuation of foreign currency and gold in a separate account called EFR - and not in its profit and loss account. During 1995-96, there was an addition of Rs 4,438.27 crore in this account taking its balance from Rs 7,538.15 crore as on June 30, 1995 to Rs 11,976.42 crore in June 1996.

The central bank uses part of the exchange fluctuation reserve to meet the exchange losses on accrual basis in respect of liabilities under those schemes where the Reserve Bank provides the exchange guarantee. This is done through transferring the amount to an exchange equalisation account (EEA).

The EFR comes under pressure if there is an appreciation in rupee vis-a-vis major currencies or a fall in the price of gold. A one per cent appreciation of the rupee against the dollar lowers the EEA by Rs 600 crore, while a one per cent fall in gold prices leads to an erosion of Rs 175 crore.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.