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

The study reveals that while growth-oriented macro-economic policies can reduce sovereign risk, gold holdings of a country’s Central Bank 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 primary cause of credit restriction.

In this context, Arvind Sahay, Chairperson, India Gold Policy Centre, IIM-A, said that due to necessary countercyclical fiscal stimulus and a build-up of government debt during the Covid-19 crisis, sovereign credit ratings of both advanced and emerging market economies have come under pressure.

The findings of this cross-country study suggest that higher Central Bank gold reserves can help in stemming a further deterioration and provide support to the credit ratings of countries such as India, he added.