Bhargava N Vaidya is a rare breed in the Indian gold market, a professional in a market place full of family scions. Now a director with the BBA and a bullion advisor to several banks and bullion houses, he has made an in-depth study of the recently announced gold deposit scheme (GDS) alongwith the Indian bullion markets. Excerpts from a chat with Sanjiv Arole of FE Thinktank are provided below:Is India ready for a bullion exchange? Does it have the infrastructure for the same?
My dream is a ‘Mumbai Bullion fix’. A bullion exchange is, therefore, a prerequisite. And, yes, the time is ripe. Many do not realise that we had a full fledged forward trading system operating under the auspices of the Bombay Bullion Association (BBA), before the obnoxious Gold Control Act put a halt to it in 1962.
While the trading ring is still in place, the safe deposit vault has been leased to Bank of India. However, the infrastructure is easily replicable. In fact, futures trading in silver continued well into the ‘70s. Thus, the expertise is not lost and forgotten. Special import license (SIL) and a developed currency market mean that expertise in futures-based trading is available. Moreover, gold being a monetised asset is nearer to currency markets than to commodity markets (margins are higher for gold). So, trading applications for gold are just extensions of forex transactions.
It would amaze you to know that several Indian companies were involved in setting up exchanges in Malaysia and Indonesia. Also, there are many of Indian origin on the Comex. The tabling of the derivatives bill is a step in the right direction. Being the largest consumer of gold and having no say in world bullion markets is an aberration that needs to be rectified sooner than later.
As far as electronic trading goes, a bullion exchange will need to tie up with either the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Even the GDS should be listed on either of the two exchanges.
Will the gold bond scheme be a success? If yes, then why? Does the GBS have any shortcomings? If yes, elaborate on them.
If collecting 100-150 tonnes in a year is the yardstick, the scheme could be a success. However, a great deal of marketing effort will be required. It is necessary to tap high worth individuals who have a say on the board of trustees of religious and other institutions, temples, etc., wherein most of the ‘idle’ gold lies. It is important that the jewellery trader is encouraged to participate in the scheme by offering incentives and commissions. It is pertinent to note that many private gold deposit schemes are in vogue all over the country.
Will ‘no immunity’ hurt the GDS?
This is the first gold bond that is legal, in the sense that all previous bond schemes, including the 1993 one that netted a mere 40 tonnes, were covered by the amnesty clause. The earlier schemes encouraged individuals to import fresh gold and invest the same in bonds. So, the real purpose of tapping the hoarded gold was not achieved.
Coming to the latest scheme that is open-ended, immunity makes little sense. Also, its rate of interest is such that it will not encourage people to shift their savings bank account to gold. Banks are also not geared to take too much of gold. Anything in excess of 200-300 tonnes could prove to be counter-productive.
What is imperative for the success of the scheme is that banks market the scheme on the ground level by moving out into the field. You cannot market it from your desktop.
What about the gold accumulation plan (GAP)? Any idea if it has been shelved? How will it benefit the domestic bullion markets?
Gold accumulation plan is a good concept. Anybody who wants to invest in gold regularly but cannot do so for want of assured quality, can take advantage of such a scheme. He can obtain a certificate in gold’s stead, something like a recurring deposit account, and convert it into gold at the end of a specified period.
Such a deposit account or certificate can be used by depositors as and when they wish to exchange them for physical gold. However, it should not encourage paper gold. For if gold so accumulated is in excess and it, thereby, drastically reduces India’s import of gold, it could also depress prices and bring the value of the country’s largest asset down. If derivative trading in gold is allowed, then, gold bulls in India (India has most number of gold buffs in the world) would take care that the gold price remains high. The average turnover of bullion at the LBMA was $9 billion in the current year. It is a known fact that it is not physical gold but paper gold that drives gold prices.
Will GBS improve the quality (caratage) of gold sold to consumers in the long run?
Not directly. The reason being that most of the jewellery tapped will be old. Thus, even if the quality of jewellery is not up to the mark, the consumer has no recourse. However, this will certainly create an awareness in the market place about quality or lack of quality in jewellery. In the last couple of years, particularly after the advent of branded jewellery, the quality of scrap has come closer to 22 carat than to the sub-standard 16-18 carat jewellery that used to be palmed off by unscrupulous jewellers in the past.
Moreover, GDS will help develop the domestic gold market, which, in turn, will set forces in motion to curb sale of sub-standard jewellery to hapless consumers.
If gold accumulated under the GBS is offered on loan basis to domestic jewellers at a nine per cent interest as stated by the SBI chief G Vaidya, will it lead to speculation? Will it also see more jewellers turning independent by opening new shops?
First of all, the rate of interest charged for lending will depend on the exit route available to banks. The Reserve Bank of India (RBI) should put the minimum rate at eight to nine per cent at least. Even at nine per cent banks may have to park their dollars outside, so as to reduce the exchange risk. At nine per cent interest, there could be some speculation. However, all parties should stick to their profession/vocation. Things could turn messy if jewellers turn speculators or dealers behave as jewellers and so on. If more entrepreneurs enter the jewellery market due to gold lending, it would be for the better. The aim of lending gold is not to increase stock on the shop floor but to remove the risk attached to gold and bring down the cost of holding an inventory by serving as an ancillary benefit.