It is not surprising that India is the biggest consumer of gold in the world. Every family wants to own gold and notwithstanding all the restrictions on imports, we seem to have accumulated high stocks of gold over the centuries. After the Gold Control Act was repealed and when first Exim Policy was announced, Government allowed three distinct routes for the import of gold for the domestic as well as export markets. These were NRI imports, imports against SILs and through nominated agencies.

Attractive rates of Customs Duty were announced to encourage NRIs to bring in gold so that the much needed foreign exchange, a scarce commodity, could be spared. This policy framework paid us rich dividends. The official import of gold jumped from 95 tonnes in 1992 to estimated 285 tonnes in 1997. The export of gold also picked up simultaneously.

The export of gold jewellery was approx. $264 million in 1992-93, in five year's time this figure was doubled. But since the world trade in gold and silver jewellery is nearly $20 billion, our chunk is less than around $600 million. The Union Government and the Ministry of Commerce have chosen gold jewellery as a thrust area for exports.The Union Government has been examining what measures must be taken to improve our exports. One of the main constraint has been the availability of gold.

India is the world's largest gold buyer. Traditionally a small producer, it is estimated to have about 9,500 tonnes of gold in private holdings. Most of this stocks have come from abroad. In the first six months of fiscal year1998-99 (Apr-Mar), gold and silver imports at $2.9 billion were the second largest, next only to petroleum products.

To facilitate shift from illegal imports to official channel, Government allowed, among others, 13 banks to import gold. They are permitted to sell gold to specified user categories like jewellery exporters. So this was the time the commercial banks entered the gold banking scenario.

A RBI panel was also set up in late 1998 to study the situation. The panel saw the need of redefinition of our country's Gold Policy with an emphasis on promoting exports of gold jewellery , recycling available gold stocks to reduce imports and development of a local gold market.It also recommended the establishment of a gold exchange in the country so that India can play a significant role in world gold prices. According to the RBI panel, as a first step to develop the market, it is necessary to establish the Inter-bank Spot/Cash Market in gold. Once the underlying cash market is adequately developed, the stage will be set for the establishment of a gold exchange which will promote transparent trading system in gold and it's derivative products.

With a view to mobilise gold, committee has suggested an outright purchase scheme. Under the scheme, bank will open a window to effect outright purchase of gold from gold-holders in any form, including bars and jewellery. This scheme is expected to help mop up gold and reduce import demand. It will also benefit the seller as (a) he will get a better price; (b) there will be greater transparency; (c) there will be reliable and credible machinery for the assessment of gold quality.

Further, the committee also suggested permitted banks to open Gold Deposit schemes. Under the scheme, commercial banks would be allowed to accept deposits in physical gold to be repaid after the maturity period with an interest rate that is in alignment with International gold lease rates. The account will be denominated in gold terms and interest too will be paid in terms of gold, the committee said.

At redemption the depositor will have the option of repayment in gold or in rupees.At the same time, Reserve Bank of India also planned to encourage banks to mobilise the existing idle stocks of gold and recycle them. At this instance, some banks approached Reserve Bank of India with their schemes. Based on the recommendations as put by the RBI panel and the schemes presented by some of the commercial banks,Gold Deposit Bond Scheme was formally announced in the Budget `99.

The salient features of the scheme are : o The commercial banks will be permitted to take deposits of gold from the public in the form of jewellery or any other form.
o The bank will be issuing deposit certificates to the depositor which will entitle them to get those converted into gold at maturity.
o The rate of interest on the deposit is likely to be in the range of 2.5-3.5%.
o The investor would be eligible for various tax incentives announced along with the budget in the Finance Act 1999.
o The bank would be allowed to deploy the gold so mobilised in the market either as loan or direct selling to exporters etc.
o The banks would be able to hedge their exposures in the international markets.
(The author is a Fund Manager & Consultant with an Indian Financial Institution. The opinions expressed, do not, in anyway, reflect the corporation's views, and are solely that of the author. This is not intended as an offer or solicitation to buy or sell, or methods to trade. For any queries, the author can be reached at aghiya@vsnl.co)