Credit risk

Increase in central bank gold reserves reduces sovereign credit risk (IGPC study)

Central Bank gold reserves can reduce a country’s sovereign credit risk in international markets, finds a study by the India Gold Policy Center (IGPC) of the Indian Institute of Management – Ahmedabad ( IIM-A).

The study finds that while growth-oriented macroeconomic policies can reduce sovereign risk, the country’s central bank gold holdings have a strong impact during turmoil in global financial markets.

In 2020, Moody’s downgraded India’s sovereign rating to Baa3, highlighting its weak fiscal position as the main cause of credit crunch.

Against this background, Arvind Sahay, President of the India Gold Policy Center, IIM-A, said: Market economies are under pressure.

“The results of this cross-country study suggest that higher central bank gold reserves can help stem further deterioration and support the credit ratings of countries like India,” he added.

In the current scenario, the results appear to have positive implications for India.

IGPC study

IGPC claims this is a one-of-a-kind study of global markets conducted by the team of Sawan Rathi, PhD student in economics, Sanket Mohapatra, IIM-A professor in economics and Sahay.

The researchers took into account five-year sovereign credit default swap (CDS) spreads for 48 advanced and emerging economies over a 20-year period, from 2000 to 2020, to measure the economy’s risk of default.

See also: Asian stocks extend global fall as inflation fears bite

The data was compared with information on central bank gold stocks obtained from the World Gold Council database. The results of the study reveal a negative and significant association of sovereign CDS spreads with the gold holdings of an economy’s central bank.

Reduce uncertainty

The researchers noted that the likelihood of a credit rating downgrade decreases as central bank holdings of gold increase, reducing future uncertainty and reassuring investor and policymaker confidence.

It studies the variation of the negative relationship between central bank gold reserves and sovereign CDS spreads, especially during periods of high volatility in global financial markets and country specific crisis.

This variation is even greater during periods of high global volatility, as well as in the event of a country-specific debt and inflation crisis. There has been a general increase in the stock of RBI gold reserves since 2018.

Aid diversification

Sanket Mohapatra, Professor at IIM-A, said: “Central Bank gold reserves are known to aid in the diversification of global international reserves and can increase yields when international interest rates are extremely low. or negative.

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Central bank gold reserves can also have a positive impact on sovereign creditworthiness, especially in times of financial market volatility and crisis episodes.

More active participation in gold can diversify India’s overall international reserve portfolio. He is optimistic that gold is playing the role of stabilizing agent for India’s external position.

Notably, according to World Gold Council data for the second quarter of 2021, India added more than 42 tons of gold in the past year to its reserves to reach 703.71 tons. India’s gold reserves have increased 13%, or around 85.5 tonnes, since the second quarter of 2019.


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