Inflation to keep gold demand high, finds RBI panel

Written by fe Bureau | Mumbai | Updated: Feb 7 2013, 06:44am hrs
The demand for gold from the people that has deepened the countrys current account deficit plight is unlikely to dampen in the near term unless policymakers ensure an environment of low inflation on a sustained basis, says a panel of the Reserve Bank of India formed to study gold imports.

A necessary pre-condition for reducing the excessive demand for precious metal is to ensure benign inflationary environment along with achieving and maintaining macro-economic stability, the working group said in its final report released on Wednesday.

Worried over rising gold imports and a consequent worsening CAD, the Reserve Bank of India had formed a working group to suggest measures for the same. The group had invited comments from stakeholders on its draft report it submitted in January. The group has given various recommendations to reduce gold demand, but maintains that it will be a big challenge to do so as gold has given the highest returns to investors off late.

To make a candid submission, as of now, there appears to be no close substitute to wean away investors attention from gold in terms of the returns, liquidity and ease of undertaking operations, said the report.

A sustained high inflation rate stretching over two years since 2010 has driven investors to pour money into gold and real estate. Average inflation rate was around 7% for five years from 2006-2007 onwards while average gold price surged over 23% in the same period.

To counter inflation rate, investors have imported nearly 1,080 tonne of gold in 2011-12, about 45% more than in 2010-11. Gold imports had contributed to more than 60% of the $78.2 CAD in 2011-12. Gold imports were 3% of gross domestic product and CAD was 4.2% of GDP that year. CAD has since worsened to 5.4% in April-June of 2012-13.

As the report says, gold investment will remain significant going forward, said Abheek Barua, chief economist at HDFC Bank.

Barua said some signs of waning in demand is seen as inflation comes off and concerns over the consistent bull run in the yellow metal instils caution in investors.

To curb gold demand, the working group has recommended the imports duty on gold must be revised from time to time. The government has hiked import duty on gold twice to curb imports.

Further, innovative financial products that could offer returns similar to gold must be introduced. Products such as inflation indexed bonds and those linked to gold as well can be introduced, the report said.