RBI steps may lead to round-tripping of gold

Written by Devangi Gandhi | Mumbai | Updated: Jul 24 2013, 19:01pm hrs
GoldRBI?s Monday circular, changing import conditions once again and lifting the earlier restrictions, has left the industry confused.
At a time when jewellery makers and bullion dealers were coming to terms with the new restrictive gold import policies announced last month, RBIs Monday circular, changing import conditions once again and lifting the earlier restrictions, has left the industry confused.

The latest guidelines rationalising gold imports by linking them to exports are primarily being seen as a big positive for export-focused jewellery producers. However, they may also lead to false reporting of exports called round-tripping, believe industry players.

The latest norms are to ensure that imports by an entity are not more than five times their exports. While these changes make exporters the biggest beneficiaries, they may also lead to a rise in delusive reporting of exports by pretend value additions like packaging changes, said a sector expert.

In 2012, India's gold exports stood at about 220 tonne or 25% of net imports of 860 tonne, almost 170 tonne of it was round tripping, as per estimates put out by gold consultancy Thomson Reuters GFMS, On Monday, RBI in a circular said nominated banks and agencies that import gold have to ensure at least 20% of every lot of imported gold is exclusively made available for export with this quantity to be retained in customs bonded warehouses. They are permitted to undertake fresh imports only after the exports have taken place to the extent of at least 75% of gold remaining in customs-bonded warehouses.

As per Kotak economic research, these steps can help to cap gold imports only to an extent. Compared to banning the consignment route which has now been reversed the measures are likely to be negative for the current account deficit as they reduce funding challenges for domestic jewelers, it said in a note.

Some market players said that the rules are applicable to the institutions importing gold and hence may not affect the buyers who purchase their requirements from these entities.

Nominated banks and agencies may not have to push these rules on the buyers from jewellery industry given that many of their clients are exporters. The demand from these exporters can to a huge extent take care of the 20% export rule, said TS Kalyanaraman of Kalyan Jewellers.

There is a view that nominated banks and agencies may have to facilitate arrangements in which their clients with higher domestic usage may fund their export oriented clients in order to meet the export requirements laid down by the central bank. Medium-sized jewellers who do not have resources to increase exports may look to buyout shipments of smaller exporters in order to support their import requirement, said Suresh Hundia of Hundia Exports.

Following the latest steps, the domestic gold prices may trade at a premium to international prices once the demand picks up from August, ahead of the wedding season believes Hundia.

Notwithstanding the delivery of futures settlement on MCX, the premiums rose towards $15 on Tuesday compared to recent highs of $8-9, added Hundia. Gold prices rose to a one month high of R27,650/10 gram on the domestic bourses.

Meanwhile, most of the listed jewellery producers witnessed a sharp rally in their stock prices on Tuesday after RBI said that the existing conditions such as restrictions on import on a consignment basis and need for 100% cash backing for letter of credits stand withdrawn. Stocks of Shree Ganesh Jewellery House and PC Jeweller that export 40% and 25% of their sales gained as much as 12% and 19% on Tuesday. Even domestic market focused players Titan Industries and TBZ saw their shares gain about 6%.

Removal of earlier restrictions augers well for Titan as it can import gold on lease and will not face any working capital pressure. The company also has muscle to push for exports if it needs to, said an analyst tracking the company.