Many of you may agree that as Indians, most of us have an insatiable appetite and flair to own the precious yellow metal. We buy for both emotional and financial reasons. While some take refuge under the precious yellow during uncertain times or to hedge against rising cost of living; others buy with an emotional reason in mind – say, accumulating it for child’s marriage. This thus makes India the world’s largest importer and consumer of gold.

Rough estimates suggest that Indian households possess about 18,000 tons of gold. According to the World Gold Council data, about 23% of all imported gold by India was treated as investments, but 75% of jewellery was held with an investment perspective.

But now to moderate gold import demand, thereby attempting to put a leash on the widening current account deficit (which risks the country to a Balance of Payment (BOP) problem), the Reserve Bank of India’s (RBI) working group has recommended setting up of gold banks and introduction of gold-backed financial products.

This according to the country’s central bank would help in curbing gold imports, as financial products providing returns akin to the precious yellow metal may lure investors to such an investment in gold. The RBI is in favour of designing instruments such as inflation-index bonds, which can provide real returns to investors and help reduce physical gold buying spree. “Introduction of products like gold accumulation plan, gold linked account, modified gold deposit and gold pension product may be considered," the panel has suggested. Moreover, introduction of tax incentives on instruments which can help in impounding idle gold, may also be considered, the panel said.

Also, aiming to put idle gold to productive use, it is 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. It is also been proposed that the group carries out gold retailing functions; wherein it has been suggested that the gold bank may buy and sell gold, issue gold bonds and collect gold stocks. As supply side measures, the panel suggested recycling of domestic scrap gold and putting idle gold reserves of gold exchange traded funds (ETFs) to productive use.

We are of the view that, the proposal of gold banks or the Bullion Corporation of India, which was proposed in 1992 by Dr. Manmohan Singh when he was then the Finance Minister, is now apparently considered by the country’s central bank. We think that gold banks could help in mobilising non-official gold holdings, but what has to be considered that despite commercial banks allowed to mop gold and lend it to jewellers; this has failed because there’s yet tons of gold lying with Indian households and temples. This shows that Indians have preferred to hold gold in physical form for various emotional and financial reasons.

Gold ETFs now are gaining awareness. So, if gold-backed financial products are launched can provide returns akin to the precious yellow metal they may attract investors and thereby increase financial savings. But the minimum ticket size into such products should be kept low, which can enable better participation and tax incentives too should be provided.

We also believe that traditional demand of gold may not be done away with completely, in a country which approaches investing in gold with emotional reasons. In an attempt to curb gold imports, at present the Government has raised the custom duty on import of gold to 6.0%; which we think would not impede the demand for gold in India and in fact buoy up import of gold through an illegal activity such as smuggling. Likewise lower gold imports, could hurt jewellery exports. So it is quite a tricky situation given the robust consumption story of India while the Government endeavours to reduce current account deficit.

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