A couple of months back – to be precise on January 21, 2013, the Government of India slammed a 6% import duty on gold, raising it from 4% earlier in an attempt to curb widening country’s Current Account Deficit (CAD), assessing the fact that the country remains the largest consumer of gold.

Later in February 2013, the Reserve Bank of India (RBI) working group also recommended setting up of gold banks and introduction of gold-backed financial products, which in their view would help curbing gold imports as financial products providing returns akin to the precious yellow metal may lure investors to such an investment in gold. The panel also suggested Introduction of products like gold accumulation plan, gold linked account, modified gold deposit and gold pension product and introduction of tax incentives on instruments, aiding to impound idle gold. Also, aiming to put idle gold to productive use, it was proposed that a gold bank or a bullion corporation be assigned to act as a backstop facility to provide refinance to institutions lending against gold.

Moreover it is noteworthy that, RBI in its 2nd quarter mid-review of monetary policy 2012-13 (held on October 30, 2012) also advised banks not to lend to dealers or traders in gold for purchase of gold in any form (including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold mutual funds) barring for genuine working capital requirements of jewellers, thereby aiming to trim demand and speculative activities.

But all these measures haven’t been able to reduce India’s insatiable appetite and flair to own the precious yellow metal, due to various emotional and financial reasons. Gold consumption in India rose for a second straight quarter through December 2012, signalling a recovery in the world's biggest market although a slump in the first half of 2012 dragged down demand for the full year by 12%, according to the World Gold Council (WGC). And moving to next quarter - ending March 2013, early indications from the WGC also reveal gold imports to remain high. Overall imports this year are likely to be high as auspicious gold-buying occasions this year would be 20.0% more than last year, WGC has said. This year, the WGC expects India’s gold demand to stand at 865-965 tonnes, as against 864.2 tonnes seen last year. Moreover apart from the official gold imports there’s been a rise in smuggling of gold. The Government seized 174.62 kg of smuggled gold during April-February 2012-13, up 8.5% from 2011-12.

We are of the view that, while the Government expected rise in import duty on gold and the other aforementioned measures to curb gold demand; thus far it hasn’t yielded the desired results and this in turn could have detrimental effect on country’s CAD as it could widen further. Moreover, smuggling activity in gold may also remain high.

The reason for high demand for gold in our opinion is on account smart investors preferring to take refuge under the precious yellow metal during economic uncertainties, due to its trait of being a safe haven. Since global economic headwinds prevail at present and domestic economic data too is downbeat, we think many would allocate a portion of their investible in gold to hedge against economic uncertainties as smart investors are now viewing it as a monetary asset rather than mere commodity.

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