NEW DELHI, Feb 7– India is exploring various options from both the supply and demand aspect to further stem gold imports which hurts the country’s current account deficit (CAD). Among key recommendations by a working group studying issues related to gold imports and gold loan non-banking finance companies (NBFCs) in India is to limit the volume and value of gold to be imported by banks.
“There is a need to moderate the demand for gold imports considering its impact on the current account deficit. A combination of demand reduction measures, supply management measures and measures to increase monetisation of idle stocks of gold need to be put in place,” the Reserve Bank of India (RBI) said.
Last month, the government increased import duty on gold and platinum from 4 percent to 6 percent to curb excessive import of the commodity.
Gold imports in 2011-12 amounted to US$56.5 billion and in the current fiscal year up to December 2012, gold imports are estimated at US$38 billion. Gold import is a major constituent of India’s rising CAD. The CAD widened to a record high of 5.4 per cent of Gross Domestic Product(GDP) or US$22.3 billion in the July-September quarter.
Among other demand reduction measures suggested are introducing new gold-backed financial products to unlock the hidden economic value in the idle gold in the economy, better documentation of gold deals, and ensuring a better tax treatment of gold, said the reserve bank. Supply management measures include recycling domestic scrap gold, imposing export obligation on bulk gold importers and setting up a Gold Bank, which can pool the idle stocks of gold besides undertaking several other functions including providing refinance.
“Banks may continue their role as nominated agencies in gold imports, but limits on the volume and value of gold to be imported by banks may be considered under extreme situation,” said RBI. It said the rapid growth of the assets, borrowings and branch network of gold loan NBFCs need to be monitored continuously.
“There is a need to reduce the gold loan NBFCs’ heavy borrowings from the banking system to reduce their interconnectedness with the formal financial system gradually,” the bank suggested. Better disclosure standards also need to be followed by gold loans NBFCs, it said.
Among major findings is that gold loans have a causal impact on gold imports substantiating the emergence of a liquidity motive for holding gold, the bank added.
BERNAMA
