The Reserve Bank of India (RBI) was planning to introduce a financial instrument to match returns from investment in gold in a bid to check skyrocketing gold imports into the country.
Gold imports were being discouraged, as it was a substantial contributor to the country’s current account deficit, a senior official of RBI said.
While it would be very difficult to match the returns from investment on gold, the RBI would do its best to offer attractive terms through the proposed financial instrument, he added.
Quoting data from World Gold Council (WGC), he said that 23% of all gold imported into India was for investment purposes and even the use of the balance 75% for jewelry was largely driven by investment objectives.
India imported some $60-billion worth of gold during 2011/12, while the country’s current account deficit touched an all time high of $21.7-billion or 4.5% of gross domestic product (GDP) in January/March 2012 compared to $6.3-billion in corresponding period of previous year.
Some of the largest importers of gold were Indian commercial banks, which imported gold coins for domestic retail sales.
Expressing concern over the trend, the RBI has noted that banks’ import of gold had increased from1% of total imports in 2009/10 to 3.8% of total imports in 2011/12. India, the world’s largest importer of gold, shipped in 950 t of the metal in 2011/12. To put in perspective, crude oil constituted 31% of India’s total imports, while gold imports accounted for 12.6%.
The RBI has informally asked commercial banks to slow down the import of gold coins but given the retail demand for the product, commercial banks have not heeded the advice. The RBI has now formed a committee headed by an executive director to suggest measures to phase out import of gold coins by commercial banks.
However, on a note of caution, a commercial banker said that supply-side measures to check import of gold would have limited impact with risks of pushing the trade underground and increase in black market rates.
The Indian demand for gold was sociological driven by festivities and marriages even though gold had emerged as a preferred investment for the large middle class and government and RBI initiatives should be focusing on financial literacy to reduce interest in `dead asset like gold’ he said.
According to the Bombay Bullion Association, Indian import of gold during the next six months could rise by 20% at 300 t, riding on the festive and marriage season ahead.
Edited by: Esmarie Swanepoel