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Twin pills to curb gold craze

Gokarn, Chaudhuri: Offering tips

Pune, Nov. 25: Two of the country’s top bankers today proposed dematerialisation of gold and banks be allowed to buy it back as an unsatiable demand for the yellow metal threatens to create a gaping hole in the country’s current account deficit.

Reserve Bank deputy governor Subir Gokarn said there was a need to “dematerialise” gold like any other financial product to reduce its physical imports.        

“It (high gold imports) is creating some macroeconomic stresses and so the challenge is to find ways to replicate the financial characteristics of gold without necessarily causing physically importing,” Gokarn said.        

SBI chairman Pratip Chaudhuri said the RBI should take a relook at the ban on banks buying back gold as such a move could improve liquidity in the system, increase supply of the metal and bring down imports.

Gokarn and Chaudhuri were speaking at a banking conference here.

Reading out the high gold import data, Gokarn said a working group headed by K.U.B. Rao of the RBI would soon come out with its report on the ways to deal with the problem arising from high imports.        

He said while the global output had stayed stable at around 4,000 tonnes per year, domestic consumption had doubled to 1,000 tonnes annually since 1999, despite a massive rally in the prices.        

“More expensive gold is being imported in larger quantities, which is compounding the troubles,” he said.

As imports touched a record high last year, pushing up the current account deficit to an all-time high of 4.2 per cent of the gross domestic product (GDP), the RBI had unveiled a slew of curbs on purchase and financing.        

Last fiscal, there was a 39 per cent rise in gold imports and in gross terms, it constituted 80 per cent of the current account deficit, Gokarn said, adding that the net imports constitute 1.8-2.4 per cent of GDP.

This spike in demand was in spite of the record price rally that the metal witnessed last fiscal.        

In April, the RBI had brought down the loan to value (LTV) that gold loan companies such as Muthoot Finance or Manappuram Finance could offer to just 60 per cent of the market value, from a high of 85-90 per cent.        

In its October 30 credit policy, the RBI also banned banks from funding gold buying by gold loan firms and non-banking finance companies.

Buyback ban

Chaudhuri expressed concern at the ban on buying by banks.

Banks are not allowed to trade in the commodities market, including gold, as the regulator and the government fear that their entry can stoke inflation.

“The existing ban is impeding the liquidity of gold holdings in the country.

“Today all banks sell gold, but the RBI does not allow them to buy back their own gold. Suppose, somebody has taken gold from my bank and the same gold, even without opening the seal comes back to me, I cannot buy it back,” Chaudhuri said.

“What could be the underlying thought? Don’t you think it is impeding the liquidity of gold holdings in the country,” Chaudhuri asked Gokarn, to which he responded that the RBI could revisit the subject once it gets the Rao report.

Experts blame rising demand, price rise and the surge in imports on hoarding by jewellers and other market participants.

India’s net gold import is likely to be about 800 tonnes this year following a pick-up in demand during the festive season, according to the World Gold Council.

 
 
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