An RBI committee today proposed a slew of measures to curb the massive & ever rising Gold Demand of the world’s largest Gold consumer’s as India shifts into higher gear in the damage control mode. The RBI – Reserve Bank of India today proposed new measures like mandatory quoting of PAN numbers for high-value purchases, restriction on Gold Loans and check on NBFC branches dealing with gold loans. The Reserve Bank committee also suggested cheque payment for gold purchase beyond a threshold, introduction of other savings products to discourage investment in physical gold, prohibition of bank finance for buying gold and revival of the two-decade old proposal to set up a Bullion Corporation. The RBI could also limit Gold imports by banks in “extreme circumstances,” it said on today, as it put forward measures to help the world’s biggest consumer of gold rein in purchases and battle a record-high current account deficit. India, which imported about 750 tons of Gold Bullion last year with 60% of that through banks and other government agencies like MMTC and STC, has already increased the import duty on gold, which now stands at 6%. But a record high current account deficit of 5.4% of GDP in the September quarter has raised concern at the central bank, prompting it to link further monetary policy easing to a lower current account deficit (CAD). “If the CAD remains sustainably high, say in 5.5-6% range, for the next three-four quarters, then it might be a case of an extreme situation,” a senior official with direct knowledge of the matter told Reuters. The Reserve Bank of India (RBI) said it would also consider introducing gold-linked financial instruments to divert savings of inflation-wary Indians from Gold Bars and Gold Coins into bonds, it said in a report published on Wednesday.
Pan Card a must for Gold & Gold Loans:
The RBI suggested that NBFCs may obtain a copy of PAN Card in all the loan proposals exceeding Rs five lakh per borrower to strengthen mechanism of KYC. Currently, PAN card is mandatory for jewelry purchases beyond Rs 5 lakh. The committee underlined the need for continuous monitoring of rapid growth of assets, borrowings and branch network of Gold loan NBFCs, while making a case for reviewing fund raising by them, reported the Economic Times. The recommendations include making use of idle Gold Reserves, which is about 20,000 tonnes, by setting up a Gold Bank and using the reserves of exchange-traded funds – Gold ETFs to productive use, but said there was no case for granting Gold Loan NBFCs a status at par with banks. Giving its rationale for setting up a gold bank, the report said, “The proposed Gold Bank may be given powers to import, export, trade, lend and borrow gold and deal in gold derivatives.”
The recommendations now go to government for review and after its feedback; the RBI should announce new restrictions and products to curb gold import demand in the next few months. Import Duty rises helped to cut imports by 25% last year. Analysts have been skeptical if these measures would have any serious impact on purchases in a country whose passionate obsession with Gold means households have more stored away than the US Federal Reserve. And the central bank itself, describing demand for gold as “excessive,” added that it would only be reduced if inflation were benign and there was price and macroeconomic stability. Headline inflation fell to a three-year low of 7.18% in December but still remains above the central bank’s comfort level of around 5%.
More small steps to Curb Gold Import & after Effects:
Other measures could include a special “gold bank” which would buy gold from individuals at much higher rates than those offered by local jewelers in an attempt to move some of the 20,000 tons of gold stored by households into the economy. “Even if these proposals are implemented, the impact on gold import will be limited till the point it is possible to unlock the idle gold stock,” said Samiran Chakraborty, regional head of research Standard Chartered Bank,India. “I think these rules could have a marginal impact on the current account deficit due to the shock-and-awe effect, but not a sustained impact,” Chakraborty added. “More restrictions from the government will result in more illegal imports. Unofficial imports have already started in Mumbai,” said Kumar Jain, vice president, Mumbai Jewelers Association, which groups 12,000 jewelers. The RBI itself admits these are only small steps and unlikely to bring down gold imports significantly in India. “Demand for gold in India is autonomous and may not be amenable for reduction through policy intervention. Several studies have empirically validated that gold can be regarded as a long-run inflation hedge,” the RBI said in its report. Other measures proposed include removing incentives for banks to trade bulk gold with jewelers as banks have been charging them rates below the so-called base rate offered to their best customers, a move which could sharply bring down gold loans. Banks extend gold loans in the form of gold bars to traders at a fixed rate. The central bank also wants to educate rural customers, who buy some 70% of imports, about investing in gold related products, but fell short of details. Some 70% of India’s population lives in rural areas where access to banks is poor.
ETF Gold Holdings in India reach 40,000 kg:
14 Gold Exchange Traded Funds (ETFs), which allow investors to trade in the metal in non-physical form electronically on stock exchanges, have together garnered a staggering amount of 40,000 kg of this precious bullion. The Gold ETFs, which debuted in India about six years ago, aim to provide the investors returns linked with domestic price of physical gold, but Gold Holdings are maintained in demat form. The first Gold ETF was launched by Benchmark Mutual Fund (now Goldman Sachs) in early 2007 and now there are 14 mutual fund houses present in this segment managing gold assets worth nearly Rs 12,000 crore, as per the data available with industry body AMFI. In terms of gold weight, Goldman Sachs Gold ETF manages 11,218 kg, followed by R Shares Gold ETF with nearly 9,800 kg, Kotak Gold ETF and SBI Gold ETS hold about 4,500 kg each, reported the Economic Times. Comparatively smaller gold ETFs from UTI and HDFC fund houses manage gold weighing less than 3 tonnes each, individual portfolio for December 2012 shows. One ton is equal to 1,000 kgs. At about 40,000 kg or 40 tons, India’s total Gold ETF dump is however only about 10% of the 398 tons of gold imported in the April- October 2012 period. Rising prices and continuing investor demand for gold has seen ETF assets as well as reserves double from May 2011. A recent RBI working group had recommended that to gainfully use the gold reserves with Indian ETFs and reduce the demand for gold, a certain part of the total corpus of the fund could be loaned to the permitted categories of bulk gold importers. To check imports, the government has also hiked duty on gold to 6% from 4%. It also linked gold ETF schemes offered by mutual funds to gold deposit schemes of banks with a view to increase availability of physical gold in the market. Gold import, which was only second to Crude Oil, contributed to the Current Account Deficit, which widened to a record high of 5.4% of GDP in the July-September 2012 quarter. Even the Reserve Bank in its policy review has raised concerns over the high gold import and CAD.
Crude Oil imports are more responsible than Gold for India’s Deficit – HSBC:
India largely depends on imports for Crude Oil & over 70% of its Crude Oil demand is met through imports. This oil demand is rising at an alarming pace & thus India’s rising Current Account Deficit – CAD, can’t be blamed only on Gold imports but first & foremost to its increasing Crude Oil consumption, according to a top HSBC official. Gold imports constituted around 35% of the deficit. HSBC head of global markets for India Hitendra Dave said rising crude oil consumption, and not gold import, is the real culprit that is pushing up India’s current account deficit to record high. But I know all the focus is on Gold.India, the world’s largest gold consumer is also one of the largest oil consumers and imports over 70% of its oil demand, he said.
Gold Demand gap due to curbs from India filled by China:
Strong Chinese Gold Demand appears making up for lost consumption in India. Hong Kong’s Census and Statistics Department showed China imported record quantities of Gold from Hong Kong in December. Gold Imports in December rose to a monthly record of 114,405 kilograms, according to data from the department yesterday. Gold imports into mainland China from Hong Kong surged 94% to an all-time high last year as rising incomes in the world’s second-largest economy underpinned increased demand and helped the metal to post a 12th annual gain. Mainland China imported 834,502 kilograms (834.5 metric tons), including scrap and coins, compared with about 431,215 kilograms in 2011. Due to factors such as higher duties on gold imports, India’s gold demand likely fell last year to just over 700 tons. Over the year as a whole, China imported a net quantity of 557.5 tons of gold from Hong Kong, likewise a record and 47% up on 2011. If it is assumed that China, the world’s largest gold producer, itself produced almost 400 tons of gold last year, the total Chinese Gold demand will have been over 950 tons, which would mean that China had overtaken India as the world’s No. 1 consumer of gold on a yearly basis. China is thus filling the presumed gap left by India, although temporarily.
RBI panel revives Manmohan Singh’s 1992 idea of ‘Gold Bank’ – Economic Times