It looks like gold prices are set to soar. The Reserve Bank of India (RBI) may, under “extreme” conditions, consider limiting the value and quantum of banks’ gold imports as a tool to rein in any runway current account deficit (CAD).
CAD is the outcome of imports exceeding exports, and is expressed as a percentage of the gross domestic product. From the RBI’s perspective, CAD in the 5.5-6% range for the next three to four quarters, which is a possibility, is an “extreme” condition. India is the world’s biggest gold consumer; it imported 1,080 tonne worth Rs2.69 lakh-crore last fiscal, 56% of that through banks.
Any RBI curb on gold imports will complement the government’s recent hike in import duty on gold to 6% from 4%, brought in to tame the 5.4% CAD in the July-September quarter.
“Once the CAD situation improves”, any curb on banks’ gold imports “can be reviewed”, said RBI in a report on Wednesday.
Industry experts labelled the proposed restrictions “desperate” and said they could merely drive up gold prices without curbing imports. For, the underlying demand is not too dependent on cost considerations. “Imports could actually be diverted from banks to hawala channels,” said Sujan Hajra, chief economist at Anand Rathi Securities.
To pre-empt this scenario, the RBI may introduce tax-free financial instruments such as gold bonds.
—With inputs from Reuters