Gold ETF: the frontrunner among idle assets in India

Over Rs 15,000 cr funds are locked in the various schemes of gold trade funds

With over Rs 15,000 crore funds locked in the various schemes of gold trade funds (ETFs) amid burgeoning current account deficit (CAD), experts call for its diversion towards more fruitful options.

Responding to a question on the possible avenues for diversion of this fund at a conference organised by Kotak Institutional Equities on Wednesday, Ramesh Abhishek chairman of the Forward Markets Commission (FMC) said, “Gold is the most participated contracts on futures trading platforms. With a 4% margin, traders can book similar quantity of gold in futures market while the remaining fund can be utilies for other options.”

While investment in gold ETF requires 100% cash upfront, investors can book equal quantum of the yellow metal in futures market with just 4% of upfront payment. The remaining 96 per cent of the investible fund, however, can be diverted for other purposes for the fund's circulation and potential for higher returns.

Bullion dealers and gold analysts also have criticised the government’s move of merely raising import duty to six per cent now from a negligible less than one per cent a year ago to discourage physical holding of the yellow metal by traders and individuals. “The Finance Minister did nothing for the ETF which is a dead asset for investors and fund houses alike,” said Ashok Minawala, ex-chairman of the apex trade body All India Gems & Jewellery Trade Federation (GJF).

Generally, fund house keep the physical quantity of traded gold in their custody for delivery in case investors seek redemption. This is causing a major problem in our country, said Minawala.

A number of fund houses offer various gold schemes for small and retail investors to park their fund on periodic and one time basis.

The CAD was reported at 4.2 per cent of the gross domestic product in 2011-12 which went past its previous highest record of 3 per cent level seen in 1990-91. Near five per cent is considered as alarming.

With the robust risk management system with three layers of strong regulations - the Ministry of Consumer Affairs, FMC and the exchange themselves – traders have not complained to have any major issue with commodity trade in the past six months. No defaults have been noticed.

Gold’s price discovery is not happening in India. Volatility in global markets affect does have a repercussion in Indian markets. Also, a number of individual jewellers have come out with gold saving schemes resulting into the yellow metal demand continuously going up.

“One has to come up with an option to discourage physical gold,” said Abhishek.

The World Gold Council (WGC) data showed India’s gold demand at 262 tonnes in the last quarter of 2012 compared with 185.5 tonnes in the corresponding period last year. Despite the government four-fold increase in customs duty to discourage gold imports, its arrival into the country saw a minuscule 12 per cent decline at 864.2 tonnes in the calendar year 2012 compared with 986.3 tonnes in the previous year.

The FMC has frequently organized awareness programmes in various parts of the country to attract participation from a wide gamut of traders across the country.