The Centre is reviewing the gold import policy and is considering a ban on the sale of gold coins by banks. These measures are being considered as the demand for gold is showing no signs of dampening, especially after a crash in prices since April.
High import of gold, along with oil, are the key drivers of the current account deficit (CAD), which hit a record 6.7% in the October-December quarter.
Finance minister P Chidambaram said on Monday that the government is reviewing the gold import policy as the country, the world’s top consumer of gold, cannot afford an increase in imports of the yellow metal. Gold is considered an idle asset and the government and the RBI have been trying to channel household savings into more productive instruments.
The issue was discussed during a meeting of the sub-committee of Financial Stability and Development Council (FSDC), headed by RBI governor D Subbarao.
Echoing Chidambaram’s views, Economic Affairs Secretary Arvind Mayaram told reporters that the government is considering more measures to reduce gold imports. He added, “(The government) may consider banning gold coin sale by banks.”
The meeting, also attended by the capital markets regulator Sebi and pension regulator Pfrda, was convened to discuss issues relating to the development of the financial sector and inter-regulatory coordination. The meeting also took up some other important matters, including chit fund regulations.
After identifying the burgeoning CAD as the greatest risk to the economy, the RBI in May decided to restrict the import of gold on consignment basis by banks, only to meet the genuine needs of exporters of gold jewellery. The banking regulator also imposed curbs on banks and NBFCs for extending loans against gold coins and units of gold ETFs. The government, on its part, had increased the import duty on gold to 6% in January from 4%.
Imports of gold and silver during April rose 138% to $7.5 billion, leading to widening of trade deficit to $17.8 billion during the month and in turn impacting the CAD.
Gold imports by India tumbled by 11.8% to $50.63 billion between April and February from a year before due to measures taken by the government to curb the purchases, according to the finance ministry. Still the imports were well above the government’s comfort level.
In the volume term, however, the fall was to the tune of 1.6% at 951.17 tonnes during the period. The country’s gold imports touched $56 billion in 2011-12, $40 billion in 2010-11 and $28 billion in 2009-10.
Moreover, of late, gold imports started picking up. India will likely double in the quarter through June to reach 350-400 tonnes, the World Gold Council (WGC) said recently. Global gold prices crashed to their meanest in more than two years at $1,321.35 an ounce in mid-April as signs of an economic improvement in China and the US had driven up stocks and apprehensions that debt-hit European nations might cut gold holdings to save their economies had prompted investors to dump the haven asset.
However, a drop in prices witnessed buyers scrambling to lift gold in the physical market, especially in Asia, helping keep demand for the precious metal robust.
