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Amit Ghosh
''Determinants of Gold Demand in Reserve Bank of India's foreign exchange reserve portfolio.''
( 2016, Vol. 36 No.4 )
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.
Keywords: Reserve Bank of India, foreign exchange reserve portfolio, gold's share, instrumental variables, Bayesian model averaging, macro-financial fundamentals.
JEL: F3 - International Finance: General
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
Manuscript Received : Aug 15 2016 Manuscript Accepted : Oct 10 2016

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