India`s RBI gunning for gold imports - Capital Controls on Gold Imports!

Author: Shivom Seth
Posted: Thursday , 07 Feb 2013
MUMBAI (Mineweb) -

Gold prices are set to soar in India with the Reserve Bank of India limiting the value and quantum of banks’ gold imports, as a tool to rein in runway current account deficit.


India's central bank is to consider imposing value and quantity restrictions on gold imports by banks, which account for 60% of India's imports of the precious metal. Though ‘extreme conditions' would be necessary for the crackdown, the apex bank is clearly gunning for gold brought into the country.

India is the world’s biggest gold consumer. It imported 1,080 tonne last fiscal, 56% of that through banks.

A working group of the central bank has said that a combination of demand reduction and supply management steps and measures to increase monetisation of idle stocks of gold would soon be put in place.

This is expected to make gold costly, say analysts. The group has also noted the need to impose export obligations on bulk gold importers. Banks are among the chief importers.

To reduce the demand for gold imports and recycle the domestically available gold, estimated at around 18,000-20,000 tonne, banks have been allowed to buy back gold coins from the public by offering buy sell quotes.

Banks would also be allowed to use the futures markets to hedge risks in bulk gold purchases. To contain gold demand, the group recommended differential pricing of banking services and finance for gold imports.

These could include stipulation of high cash margin on opening letter of credit for the import of gold and an imposition of surcharge on interest on gold metal loans to domestic jewellery manufacturers.

The apex bank is also keen to introduce gold linked financial instruments to divert the savings of inflation wary Indians from gold bars and coins into bonds.

Though just last month, the Indian government upped customs duty to 6% on gold imports, the bank has declared that it would review import duties from time to time, in a clear signal that it wants to dissuade gold imports further.

Analysts have termed the proposed restrictions a desperate attempt by the regulator, that would merely drive up gold prices without curbing imports. They add that the underlying demand is not dependent on cost considerations and that gold imports could be diverted from banks to illegal channels.

Source: MineWeb