Indian rupee: Jewellers' body seeks to curb gold coin, bar sales

Written by Devangi Gandhi | Mumbai | Updated: Jun 25 2013, 21:48pm hrs
Gold coins
Even as the Indian rupee slumped to a new low on Monday and foreign institutional investors (FIIs) continued to pull out money from the equity and bond markets, the All India Gems & Jewellery Trade Federation (GJF) appealed to its members to stop sales of gold coins and bars to retail investors, citing the threat to India's widening current account deficit (CAD). Indias current account deficit hit 6.7% of GDP in Q3FY13 at $32.6 billion and the data for Q4FY13 will be released later this month.

The appeal is also aimed at easing the shortage faced by jewellers that seems to have emerged in the local market. This is reflected in the increased premiums sought by bullion traders which have risen to $5.5 - $6 / ounce compared to the historical average of $1.5-$2/ounce. Investment demand for gold is estimated to account for about 35% of India's annual gold consumption of close to 860 tonnes.

Gold imports accounted for roughly 75% of the CAD in FY12. Despite the government increasing the import duty on gold from 4% to 6% in January, 2013 there has been no let up in imports; on the contrary, the sharp drop in gold prices in April pushed up domestic demand with imports in April and May coming in at close to 300 tonnes, almost 35% of the total imports seen in 2012.

That resulted in the trade deficit in April and May ballooning to $17.8 billion and $20.1 billion, respectively.

In early June, the government upped the duty from 6% to 8%. Last Thursday, gold prices fell to a two and half -year low at $1296.8 per troy ounce. On Monday, the precious metal was trading internationally at $1285.20 at IST 20: 00 while domestic spot prices on the MCX were ruling at Rs 26,854 per 10 gms.

In an appeal to its 40,000 odd members and affiliates across the country on Monday, the GJF has advised that sales of gold bars and coins, representing investment demand for gold, be stopped. Along with bringing down gold imports, the move is also aimed at preventing a shortage of gold supplies for genuine jewellery demand. While theres no compulsion, we are certain our members will comply with this request given the concern over the widening CAD, said Nitin Kadam, regional chairman- Mumbai for GJF.

Policymakers have taken several steps this month to limit gold imports including raising import duty on gold to 8%, raising the cash margin for imports 100% and prohibiting any kind of credit for imports. Trade associations, however, fear that further measures may be taken.

If jewellers decide to abide by the appeal made by GJF, the sales of bar and coins which have dropped by about 50% to 60% in June as per traders in the Bombay Bullion Association is likely to come down further. Most banks have also gradually stopped selling gold coins after the RBI restricted imports of gold on consignment basis in early May.

However, not everyone expects the sale of gold coins and bars to fall significantly as buyers may shift to the black market. Such an implementation by jewellers may bring down the demand by 5% but not meaningful enough, said an official with a precious metal refiner.

While the majority of India's gold imports are for consumption via jewellery, the rise in investment demand in the form of bars and coins has added to the import pressure. Between 2010 and 2012, India has, on average, imported 345 tonnes of gold for investment purposes.

GJF believes that even if 10% of the current stock of gold holdings is channelled back into the market through schemes such as the gold deposit schemes, India may not need to import gold for next 3-4 years. Based on this view, the trade body wants RBI to further encourage gold deposit schemes to monetise the stock of idle gold in the country. It also suggested that ETFs and gold traded funds should be allowed to loan their idle gold stocks to nominated banks and channelising agencies.

The trade body is expected to meet the finance ministry on June 27 with its recommendations. Along with other recommendations, the body also plans to suggest the setting up of a National Gold Bank which can promote gold savings products.