Steps to discourage gold imports on cards

Gold price-linked bonds and mobilizing idle gold with households and depositories under consideration

Concerned with the drastic depreciation in the Indian rupee against the greenback raising alarm bell for decision makers, the Standing Committee of the Reserve Bank of India (RBI) on gold is meeting on Monday to take immediate measures to discourage import of yellow metal. Gold is seen as unproductive asset causing monitory management issues.

Committee is considering issue of bond which may offer returns linked with the gold price. Other possible measures, industry sources, anticipate could be a quantitative restriction on gold hoarding by Indian corporates and other large institutions including depositories. Gold bought by ETFs remains with the depositories unused.

 

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, huge quantity of gold is lying with Indian household which if government assures of good returns with some measures like bond, would come in circulation resulting into lower import of the metal into the country. It would save dollar for other imports and ultimately help the country to use the foreign currency for future,” said Bhargav Vaidya, an analyst with B N Vaidya and Associates, a Mumbai-based bullion analyst. Gold so mobilsed can be lent to jewelers replacing need for importing.

Rising average asset under management (AAUM) under ETF is also a cause of concerns for the policy planners. The AAUM of gold ETFs has been on steady increase over the last one year. From the level of Rs 2,850 crore in quarter ended September 2010, the AAUM of gold ETFs has risen by four times to Rs 11,198 crore in September end 2012. This data also reveals many investors are increasingly flocking to paper gold or gold ETFs seemingly being aware of the various benefits of investing in gold ETFs. Half the ETF holding is with corporate.

After subdued demand in the two sequential quarters, gold demand revived in the third quarter of the current calendar year. According to World Gold Council (WGC), gold imports into India rose 9 per cent to 223 tonnes in the third quarter ended September, after a decline of more than 50 per cent in the first half to June as doubling of import duty and record high prices dented sales.

In 2011-12, India’s gold imports was worth $60 billion amid rising prices, while in FY11, it was worth $40 billion, putting pressure on the country’s current account deficit that may in turn depreciate the rupee.

According to Bacchraj Bamalwa, chairman of All Indian Gems & Jewellery Trade Federation (GJF), the jewellery industry sent its recommendation to the government recently in which we laid out two major points. Firstly, the gold lying with ETF depositories like NSDL remains idle for years which the government must bring in circulation. Secondly, the government should take measures to avail gold to jewelers in the form of working capital loan with 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.

The Standing Committee’s possible measures, however, would have a cascading affect on employment generation in gold and jewellery industry which employs around 1 million tonnes of skilled and unskilled labourers directly and indirectly.

Meanwhile, RBI has asked banks to restrict financing of purchase of gold in the form of bullion, jewellery and coins or units of ETF as a latest measure to curb gold imports to counter ballooning fiscal deficit.