Golden Step

Cynics may well ask what the excitement is about when all actual users exporters and traders already have free and almost unlimited access to gold imports. That is of course the case: the matter of shifting gold from the special import licence route to OGL is only a small step. But it is not the end of the story. The Tarapore Committee has recommended several financial instruments with gold as the underlying asset. While there is a remarkable integration between the local money and forex markets, the market for precious metals is the only one that is still isolated. And any successful thrust into capital account convertibility presupposes that money should be allowed to flow freely into all kinds of assets, financial and physical. Since not all residents have the capability or the wherewithal to handle the metal itself, tradeable paper is expected to proxy physical ownership. It may take some time for the seamless integration of the gold market with the other markets--indeed that was the reason why freeing gold import was suggested in the first year of the capital account convertibility time-table, outlined by the Tarapore Committee. But the essential prerequisite is that all residents must be placed on an equal footing. The point then is not about actual users but about other residents who need to be given a choice between tradeable financial instruments based on a wide array of underlying assets -- currency, bullion and physical assets.

 

The government and the RBI need to take several measures in the next few weeks to kick off the development of a transparent and well regulated gold market. While derivatives may still be out of bounds, the RBI could well take up the other recommendations as regards the gold markets. Letting banks offer gold-linked deposits and loans against gold as security could be the first steps towards encouraging households to consider the metal as a quasi-cash commodity and not only as a store of value.