Recent Policy Changes on gold and its Impact

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Bullion Bulletin News desk, May 6: High gold import has been the reason for the widening current account deficit, which has risen to a historical high of 6.7% of GDP in the third quarter of 2012-13. The recent change on norms of gold imports and lending is directed by the above concern. In its Monetary Policy Statement 2013-14, the Reserve Bank of India tightened the norms for importing gold and funding for buying the yellow metal.
The Working Group on Gold (Chairman: Shri K.U.B. Rao) had recommended aligning gold import regulations with the rest of imports with a view to reduce gold imports by creating a level playing field between gold imports and other imports.
Imports of Gold: With a view to reducing the demand for gold for domestic use, The working Group on gold has proposed to restrict the import of gold on consignment basis by banks only to meet the genuine needs of exporters of gold jewellery.
Lending against Gold: It is proposed to restrict the facility of advances against the security of gold coins per customer to gold coins weighing up to 50 grams.
The Bullion Bulletin team has received very good insights on the above issue from prominent market leaders of the bullion industry.
Mr. S Guruswamy, Director (Marketing) of Surana Corporation Limited, Chennai said, “Detailed guidelines have yet to come.  However, from the report, it is clear that RBI wants the banks to stay away from gold. If we go back to the genesis of more banks getting authorized by the RBI in 1996 (in addition to SBI, which was the only bank doing gold imports), the unwritten mandate of the Ministry of Commerce to RBI was to add more banks to the list of authorized banks for import of gold to increase availability of duty free gold to the exporters in the DTA as well as the Export Processing Zones. But this hardly happened, as all the banks authorised focused only on domestic consumption.
The current initiative by RBI may not make any difference to the overall imports, and thus the CAD, as the imports would shift to other nominated agencies under the control of Ministry of Commerce.  Last year’s import of gold exceeding 1000 tons has proved that import duty increase has had no effect on consumption. Restriction on imports might bring out the household inventory of gold but is fraught with other negative consequences, which the Government has to address before taking any step in that direction.”
Ms. Sugandha Sachdeva from Religare Commodities Limited provided a detailed view on the same. As per her, the impacts that may take place due to the recent changes are:
1) Aligning gold import regulations with the rest of imports.
Impact: It may reduce gold demand as it did before as per the World Gold Council report. In the 12 months ended December, total gold demand in India was 864.2 tonnes, down 12% from 986.3 tonnes a year earlier.

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