FE Editorial : Curing Indians of gold

RBI deputy governor Subir Gokarn has a point when he says the only way to save the widening current account deficit—and hence the rupee—is to get Indians de-addicted from gold. In FY12, India imported over $50 billion of gold, implying that this made up around 70% of that year’s current account deficit. Getting Indians off gold, however, is easier said than done since a large part of the increased demand is related to uncertain global and local economic conditions as well as to act as a hedge against inflation that is proving difficult to control. To that extent, gold demand will dampen as the economy starts picking up, as investment opportunities open up and as inflation starts to slow to reasonable levels. But there’s a bit of chicken and egg here: till gold demand remains strong, the rupee will remain weak, and that pushes up inflation which then causes another rush for gold.

This is where Gokarn’s suggestion—RBI will soon put out a paper on this—comes in. Today, if someone wants to buy gold as a hedge, this increases imports and hence the current account deficit. If, however, consumers get the features of gold without the physical import, things will be quite different. The way this could work is as follows: Person A goes to a bank with R32,530 and gets a piece of paper saying she is entitled to 10 grams of gold. The bank then books a contract in the futures market

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