Gold import clamps set to bite

Imports and demand will come down, easing current account deficit; round tripping will stop, but smuggling may rise

The Reserve Bank of India’s various recent measures to check gold import are expected to bite on both, demand and import (and, perhaps, encourage the commodity’s smuggling).

It has banned import on a consignment basis (where the importing bank doesn’t have to fund it till actual sale) and disallowed any credit facility for this. By imposing a 100 per cent cash margin, it has closed the arbitrage window, where exporters were importing gold under dollar credits at the international rate of around four per cent while utilising cash with them for domestic working capital use and saving nearly six per cent.

Also, sme large exporters were importing gold and converting it to crude jewellery with minimal cost and re-exporting to take advantage of rate arbitrage. This ‘round tripping’ will now halt.

“Putting together the latest guidelines by RBI and directives by the ministry of commerce, we estimate a significant drop in round tripping figures for calendar year 2013, compared to the 170 tonnes in 2012,” said Sudheesh Nambiath, India analyst at Thomson Reuters GFMS.

In 2011-12, imports of gold were 1,064 tonnes; in 2012-13, it was 1,015 tons. It is expected to fall to 900 tonnes in 2013-14, though imports surged in both April (133 tonnes) and May (162 tonnes). Import demand has fallen after the Akshaya Tritiya buying festival. It is estimated that jewellery and investment demand in April was 120 tonnes and only 75 tonnes in May. The huge import in May is believed to be mostly for stocking, as investors are waiting for further moderation in prices for fresh purchases.

C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, had said in April that the year’s gold import bill should be capped at $40 billion, compared to $53 bn in 2012-13. “With a nearly 10-12 per cent estimated fall in gold import after (these) measures, this is likely,” said an official with a foreign research house.

Agrees Indranil Sen Gupta, India Economist at DSP Merrill Lynch, “The curbs on imports will likely pose a $5-10 bn downside risk to our $55 bn FY14 gold import forecast.” The current account will benefit to that extent.
MIXED IMPACT

• Round tripping to halt as RBI closed arbitrage window by disallowing import of gold against credit facilities. It was creating artificial demand for dollars, putting pressure on exchange rates
• With gold import bill likely to come down by $5-10 bn, current account deficit will be under check
• Gold demand has already started coming down and might remain subdued, as investors are expecting further fall in prices
• Due to high import duty of 6% and increased cost of import due to 100% cash margin requirements, apart from high premium on physical gold, smuggling might rise