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RBI Panel Suggests More Curbs on Gold Imports

Need to moderate the demand for gold imports due to its impact on the current account deficit.
Feb 7, 2013 2:52 AM   By Dilipp S Nag
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RAPAPORT... A panel created by the Reserve Bank of India (RBI) to study issues related to gold has recommended measures such as introducing new gold-backed financial products, designing inflation indexed bonds and prohibiting bank finance for purchases of gold bullion to curb the demand.

There is a need to moderate the demand for gold imports, considering its impact on the current account deficit, according to the group. A combination of demand reduction measures, supply management measures coupled with measures to increase monetization of idle stocks of gold need to be put in place, the working group concluded in its final report that was released on Wednesday.

India’s current account deficit — which occurs when a country’s total imports of goods, services and transfers are greater than its exports — hit a record high of 5.4 percent of the gross domestic product (GDP) in the second fiscal quarter that ended September 2012.

In response, the government raised the gold import duty in January for the third time in about a year, while appealing to the people to moderate their demand. The duty currently stands at 6 percent. Gold imports in fiscal 2012 amounted to $56.5 billion and in the current fiscal year, up to December 2012, gold imports were already estimated at $38 billion.

The panel’s demand for reduction measures include designing innovative financial instruments that can provide real returns to investors, i.e., inflation indexed bonds; converting both rural and urban demand for gold into investment in gold-backed financial instruments through the dematerialization of gold and considering differential pricing of banking services and finance for gold imports, among others.

Banks may continue their role as approved agencies for gold imports but the discussion turns to limiting the volume and value of those imports, if required under an “extreme situation,” the working group stated. It also noted that there is a need to recycle considerable amounts of domestic scrap gold and impose an export obligation on bulk gold importers.

Authorities may also look at setting up  a Gold Bank, which could pool idle stock of gold and undertake several other functions, including providing refinancing, the panel suggested. Banks may expand their gold jewelry loan portfolio to monetize the stock of idle gold, and there shouldn't be curbs or limits on advances against gold jewelry and gold coins by individuals, it added.

The group suggested that there is a need to gradually  reduce the gold loan non-banking finance companies (NBFCs) heavy borrowing from the banking system so as to diminish their interconnectedness with the formal financial system. In addition, it advised the use of income tax PAN for large gold loan transactions and payment through check for such transactions.

The recent slew of regulatory measures taken by the RBI on the functioning of the gold loan NBFCs may be continued to ensure  healthy growth of the sector in the medium and long term, it noted. The RBI stated it would examine the recommendations of the working group in forming a decision. 
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Tags: bank, Dilipp S Nag, Duty, gdp, gold, Import Duty, India, Jewelry, NBFC, NBFCs, RBI, Reserve Bank of India
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