Gold imports by India, the world’s biggest user last year, may plunge after the central bank linked inbound shipments to exports to cut a record current-account deficit and stem a decline in the currency.
Overseas purchases may tumble 63% to 175 metric tons in the six months through December from a year earlier, said Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation. The Reserve Bank of India announced new rules late Monday, making it mandatory for importers to set aside 20% for re-exports as jewelry.
The curbs may cause a shortage of bullion in the domestic market as the country’s average annual exports of gold jewelry are about 70 tons, Bamalwa said. Consumption in India, which imports almost all the bullion it uses, was 864.2 tons last year, according to data from the World Gold Council.
It would tighten up supply even further than the existing measures already have, said Victor Thianpiriya, an analyst at Australia & New Zealand Banking Group Ltd. in Singapore. It is exactly what the government is targeting. It is likely to further increase smuggling and the cost associated with imports, so I expect that local prices will climb further.
India doubled a tax on inbound shipments to 8% this year and curbed financing to tackle a surge in demand after bullion entered a bear market in April. Finance minister P Chidambaram last week appealed to Indians to moderate demand, while ruling out a complete ban on imports.
 Rupee Decline
The current-account deficit, the broadest measure of trade tracking goods, services and investment income, widened to $87.8 billion in the year ended 31 March from $78.2 billion in 2011-2012, according to official data. The deficit is the biggest risk to the $1.9 trillion economy, according to the central bank. The rupee, which touched a record low of 61.2125 per dollar on 8 July, rose as much as 0.4% to 59.48 per dollar on Tuesday.
The central bank said agencies importing bullion will need to ensure that at least 20% of the shipment be made available for exports. Importers may supply gold only to the jewelry business and bullion dealers who sell to the jewelers, it said in a statement. Importers have to retain 20% of the gold in customs bonded warehouses and will be allowed to make fresh purchases only after at least 75% of the quantity has been exported, the bank said.
 Quantitative Restriction
You can see a substantial reduction in imports post these measures because these measures are becoming almost like quantitative restrictions, said Samiran Chakraborty, Mumbai- based analyst at Standard Chartered Plc. It ensures that the deficit on account of gold doesn’t blow out of proportion. There is a now a ratio that is prefixed.
Imports of gold and silver fell to $2.45 billion in June from $8.39 billion a month earlier, government data showed 12 July. Consumption in India accounted for 20% of global demand in 2012, according to data from the council. Gold for delivery in August was little changed at Rs27,558 ($462) on the Multi Commodity Exchange of India Ltd. at 11:29 am in Mumbai. Futures fell to Rs24,830 per 10 grams on 28 June, the lowest since August 2011. Spot gold in London dropped 0.4% to $1,330.07 an ounce.
The new rules will make it tougher for importers and jewelers as they will necessarily need to allocate supplies for exports, said Gnanasekar Thiagarajan, a director at Commtrendz Risk Management Services Pvt. Exporters will have to search for markets as gold exports are not doing so well at this point of time.
 Jewelry exports
Jewelry exports plunged 73% to $556.8 million in June from $2.06 billion a year earlier, according to the Gem & Jewellery Export Promotion Council. Shipments rose 13% to $13.05 billion in the year ended March, council data showed. While the central bank scrapped curbs on imports on a consignment basis and restored purchases on credit, the new measures may prompt banks to discontinue sales of coins and bars to retail investors.
Most banks had stopped minting new gold coins after the government clamped down on imports earlier and they are only selling old stocks now, said Suresh Hundia, proprietor of Hundia Exports Ltd. and a former president of the Bombay Bullion Association. Coins sales by banks is as good as stopped.

Source: Bloomberg
Source: Bullion Bulletin