RBI moves to deter rural gold buying

By Siddesh Mayenkar

MUMBAI (Reuters) - The Reserve Bank of India (RBI) told rural regional banks on Tuesday they could no longer provide loans against gold jewellery and coins - the latest move to discourage gold buying as the government seeks to reduce a record current account deficit.

Gold imports into India, the world's biggest gold buyer, hit a record 162 tonnes in May as global prices tumbled and buyers stocked up. Rural communities are particularly hungry for gold as an investment, given a lack of banking facilities outside towns.

Since May, the government has hiked the import duty on gold to 8 percent, and the Reserve Bank of India has introduced constraints that force Indians to use cash to buy gold, with purchases mostly limited to jewellery.

Rural areas account for 60 percent of demand for gold, which is India's second-biggest import cost after crude oil.

The new rule for rural banks had already applied to other banks. The central bank also asked banks to restrict lending against units of gold exchange-traded funds (ETFs).

Indians, whose obsession with gold is legendary, present gold as a gift at weddings and festivals as well as using is as an investment and as collateral.

Analysts say addressing inflation and low real interest rates would have more of an impact on the current account deficit than curbs and duty hikes on gold.

"These measures might be seen as rather self-defeating," Ross Norman, chief executive of bullion broker Sharps Pixley, said.

"It's almost as if the finance ministry is waging war on the gold sector, which would suggest that they feel they have lost control of the economy to some extent. In that environment, you would want to own gold more than ever," he added.

MORE TO COME?

Gold imports have slowed to about $36 million a day from $135 million before the curbs, Finance Minister P. Chidambaram said last week.

The government's battle has won some support from industry. Financial services company Reliance Capital has halted sales of its gold-backed funds, and the leading jewellers' body urging members to halt sales of gold bars and coins.

But with domestic prices already back near levels before the rise in the duty, concerns are growing that demand could revive, particularly as a bountiful monsoon starts to raise hopes of increased incomes for farmers and India's large rural community.

Domestic gold futures, tracking global prices, are trading around 26,735 rupees per 10 grams, not far from the contract low of 25,270 rupees on April 16 which triggered the demand surge that so rattled the government.

"International prices of gold have fallen sharply. This time around, the government could be in alert mode to avert the huge demand we saw in April," said Gnanasekar Thiagarajan, director with Commtrendz Research.

"More measures are possible (in gold) till the rupee gets into a comfort zone. And apart from gold, no other imported item which is essential can be targeted as they will lead to further inflationary pressures," Thiagarajan said.

Asked on Tuesday after the central bank's latest moves if more measures were expected, Chidambaram said "Let's see." An official of the central bank could not immediately be reached for a comment. (Additional reporting by Suvashree Dey Choudhury in MUMBAI; Manoj Kumar in NEW DELHI and Jan Harvey in LONDON; Editing by Jo Winterbottom and Jane Baird)