Rising gold imports on RBI committee's agenda today

With gold imports continuing to rise, the Reserve Bank of India’s (RBI) standing committee will meet tomorrow to recommend immediate measures to discourage it. Gold prices hit an all-time high of Rs 32,340 per 10g yesterday.

According to data from the World Gold Council, after a 50 per cent drop in the first half of the year due to the imposition of a higher customs duty, imports rose nine per cent (223 tonnes) in the July-September quarter. This is worrisome for the government, already grappling with a high current account deficit (CAD).

In 2011-12, India’s gold import was $60 billion, while in 2010-11 it was $40 billion, putting pressure on the CAD that, in turn, depreciated the rupee.

MEASURES TAKEN SO FAR

• RBI asks banks not to finance purchase of gold
   
• Tougher for NBFCs to give finance against gold/jewellery
   
• RBI discourages banks to finance NBFCs that finance gold loans
   
• In January and February, the government increased customs duty on import of gold and silver, taking total import duty to four per cent

Both the Central government and RBI have already taken some measures to discourage imports. These include increasing the duty on gold. The apex bank has asked banks not to finance gold purchases in the form of bullion, jewellery, coins or exchange traded funds (ETFs). It has made financing of non-banking financial companies by banks more difficult.

Sources said the committee is considering issue of bonds, which could offer returns linked with the price of gold. Other possible measures, industry sources anticipate, could be a quantitative restriction on gold hoarding by Indian companies and other large institutions, including depositories.

The suggestion before the standing committee is also to work out ways in which 25,000 tonnes of gold held with individual households in the country can be mobilised. “Currently, there is a huge quantity of gold lying with Indian households which, if government assures of good returns with some measures like bonds, would come into circulation resulting in lower import. It would save dollars for other imports and ultimately help the country to use the foreign currency for future,” said Bhargav Vaidya, analyst with

B N Vaidya and Associates, a Mumbai-based bullion analyst. The bullion mobilised through these measures can be lent to jewellers replacing the need for importing.

The rising demand for gold through the ETF route is also a cause of concern for the policy planners. The average assets under management of gold ETFs has risen four-fold from Rs 2,850 crore to Rs 11,198 crore between September 2010 and September 2012.

According to Bacchraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation, the jewellery industry sent its recommendation to the government recently, in which it laid out two major points. First, the gold with ETF depositories like NSDL remains idle for years, which the government could bring into circulation. Second, the government should take measures to provide gold to jewellers in the form of working capital loans at an affordable interest.

“In case the government provides gold as a working capital loan, it can be repaid either in the form of gold or cash, as the regulation may be, after completion of the tenure, with a fixed interest rate. This will be a win-win situation for both; the industry and the government,” said Bamalwa.