Deconstructing the yellow metalís sheen

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SummaryIn order to reduce the quantum of physical holdings in the country, the deputy governor of the Reserve Bank of India, Subir Gokarn, has proposed the idea of holding the metal in demat format like any other financial product.

crore in October 2012. One can invest in the yellow metal through the mutual fund route or gold systematic investment plans. It enables the investor to invest in the yellow metal in paper form. One can also invest in e-gold through the National Spot Exchange. With a demat account, one can buy gold in units as small as one gram from the exchange where you have to open a demat account and this can be converted into coins and bars. Gold purchased from the spot exchange is cheaper than buying from banks and the exchange also follows a certification process similar to banks. Like equities, the settlement of e-bullion units follows a T+2 cycle.

What are the other steps RBI has taken to curb the demand for gold?

In April this year, the central bank brought down the loan to value or LTV that gold loan companies like Muthoot Finance or Manappuram Finance could offer to just 60% of the market value, from a high of 85-90%. This was done to reduce the rising demand for gold loans as the central bank fears that if the price of gold falls, the non-banking finance companies, which form the bulk of the gold loans, will suffer. Also, last week RBI banned banks from giving advances to dealers for purchase of gold, gold bullion, gold jewellery, gold coins and even units of gold exchange traded funds. However, it allowed banks to provide finance for genuine working capital requirements of jewellers.

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