The Reserve Bank is in talks with the Finance Ministry for launching inflation-indexed bonds, which can help reduce physical demand for gold, Deputy Governor H R Khan said here today.
The move can also help balance trade imbalances as gold import has been jacking up trade deficit which in turn increases current account deficit.
"We are talking to the Finance Ministry to launch inflation-linked bonds, which can help reduce the demand for physical gold," Khan told the Ficci-organised Asian Financial Cooperation Conference here.
The move can also help arrest imported inflation in the light of the steep fall in the rupee. Typically, according to experts, a 10 percent fall in the rupee leads to a 100 basis points or 1 percentage point spike in inflation.
The rupee has lost nearly 7 percent this fiscal after losing nearly 18 percent in the last calender year.
It can be noted that last year the country imported 969 tonne gold, which contributed to record current account deficit of 4.2 percent.
This year, however, there is some taming in gold import demand and according to the World Gold Council, this is likely to slide to 800 tonnes, thus losing the years of gold-demand dominance to China by a whisker this year.
Both the RBI and the government have been taking steps to reduce gold demand through a series of measures.
As gold imports touched a record high last year, pushing up the current account deficit to a historic high of 4.2 percent in the year, the Reserve Bank has unveiled a slew of curbs on gold purchase and financing.
This spike in gold demand was in spite of the record price rally that metal witnessed last fiscal. In April, the RBI brought down the loan to value or LTV that gold loan companies could offer to just 60 percent of the market value, from a high of 85-90 percent. In the October 30 credit policy, the RBI banned banks from offering loans to gold loan companies and NBFCs for buying gold.
The government on its part had increased the import duty on gold in the Budget.
RBI had also advised banks to not extend loans for purchase of gold.
Addressing the annual banking conference in Pune last Saturday, another deputy governor Subir Gokarn had said there was an urgent need to "dematerialise" gold like any other financial product, which could help reduce physical imports of the precious metal that is in turn leading to the current macroeconomic stress.
"High gold import is creating some macroeconomic stresses and so the challenge is to find ways to replicate the financial characteristics of gold without necessarily causing physically importing," Gokarn had said.
Gokarn had also said an RBI working group head by KUB Rao would shortly submit a report on the ways to deal with the problem arising from high gold imports on the macroeconomic front in the from of balance of payments.
Gokarn had said while global gold output has stayed stable at around 4,000 tonne per year, domestic consumption has doubled to 1,000 tonne annually since 1999, despite a massive rally in the prices.
Last fiscal there was a 39 percent rise in gold imports and in gross terms, constituting 80 percent of the CAD of 4.2 percent of GDP. Net gold import constituted 1.8-2.4 percent of GDP.