RBI blocks gold on lease for jewellers

Some relief for ETFs in latest clarification; procurement should quicken but jewellery firms will find life costlier and more complex

Wednesday night’s Reserve Bank of India clarificatory circular on gold import norms has again hurt gold jewellery companies, as they will have to make full payment on buying for jewellery making.

They were so far getting gold on loan or lease from banks, saving the much-needed working capital locked in the gold till they realised money by selling jewellery.

The move will see jewellery stocks opening lower when the bourses open on Friday. However, the new norms have kept the window open for exchange traded funds (ETFs) to procure gold. Earlier RBI was categorical that domestic-use gold had to be provided to only jewellers. Gold ETFs were finding difficult to procure but, “while we have to get more quality, it looks like we will be able to procure gold from either banks directly or from bullion dealers,” said the fund manager with an asset management company having a gold ETF.

While import of gold could resume (though not in a big way), the scarcity premium for physical delivery, now as high as Rs 900 per 10g or $15, might remain. “There is little to cheer for end-consumers, as premiums will remain lofty and the consumers will not benefit from any price decline.  To detail, even a drop in price and a resulting jump in demand will result in higher premiums, as the metal will be in short supply. For a while, premiums of $15/oz is something consumers will have to live with,” said Sudheesh Nambiath, India Analyst, GFMS Thomson Reuters.

RBI said on Wednesday that “supply of gold in any form to domestic users other than against full payment upfront shall not be permitted.” While banks and nominated agencies will be free to import gold on even consignment basis, they will have to provide the gold to jewellers only against full payment.

“This will badly affect jewellery companies’ margins, as getting gold on lease or loan route has been blocked,” said a senior executive from a leading listed jewellery company. Jewellery companies will also have to take a price risk, as there is a lag in buying gold and selling jewellery made from this. “In an era of falling prices, this hurts badly,” said the executive quoted earlier.

The only benefit is that the consignment route is open for an importing agency, which will make gold available faster. “The channelising agents can import on consignment basis but can sell gold to domestic jewellers or bullion dealers only on receiving 100 per cent payment. It will help cut the lead time to a maximum of two days, which otherwise would have been five to seven days,” said a veteran bullion analyst.

The earlier rule of selling 20 per cent of the import to an exporter remains but the central bank has clarified that from each lot of import, 20 per cent should be sold to exporters. However, the condition of storing gold in a bonded warehouse till 20 per cent is exported has been done away with.

“For jewellers, while it would help cut the lead time in procuring the metal, the facility to take gold on lease has been removed. That said, availability of the metal will rest on the trust and relationship between an international supplier and importer, due to the stringent 80/20 principle.  At any point, a supplier would not want the metal to remain unsold for a long period,” said Sudhesh of GFMS.