Dogmas and the deficit

What kind of compression in gold imports can we realistically get? Even if the current surge in gold imports were to abate, there would be a "core" import demand stemming from its demand both for jewellery and, increasingly, as an asset class. As an economy, we have to learn to live with this. The exact quantum of this core demand is difficult to gauge. One could use the average annual gold imports of $15-20 billion that prevailed before the surge in imports started in 2010-11 as an informed "guesstimate".

The rising domestic demand for gold should not be viewed through the prism of the CAD alone. At a time when there is so much policy attention and public awareness about the parallel economy, it might be useful to keep in mind the fact that cash transactions in gold is a conduit for black money. Thus, the bid to curb gold holdings should also be an integral part of the drive to check the rise in the black economy. A first step to do this would be to ensure that all gold transactions over, say, Rs 25,000 are made through cheques.

The RBI's expert committee on gold has made a number of sensible recommendations to reduce gold imports. Financial products (like gold deposits) that both enable investors to enjoy the returns associated with gold but simultaneously enable banks to only hold a fraction of these deposits in gold holdings to "back" these products, could go some way in reducing the demand for gold imports. A couple of other things could also help. For one thing, there has to be an effort to make the domestic market for gold more active, so that fresh demand can be met through domestic stocks of gold rather than imports. Banks could play a major role in making this market by offering two-way quotes in gold. Thus, instead of being allowed to only sell gold as they currently are, banks should also be allowed to buy gold. The other policy initiative that would help would be for the RBI to operate a repurchase (repo) window for banks using its existing stocks of gold (currently valued at Rs 1,437.5 billion). This would help ease temporary problems of gold liquidity that banks could face in making markets.

... contd.

Please read our terms of use before posting comments
TERMS OF USE: The views, opinions and comments posted are your, and are not endorsed by this website. You shall be solely responsible for the comment posted here. The website reserves the right to delete, reject, or otherwise remove any views, opinions and comments posted or part thereof. You shall ensure that the comment is not inflammatory, abusive, derogatory, defamatory &/or obscene, or contain pornographic matter and/or does not constitute hate mail, or violate privacy of any person (s) or breach confidentiality or otherwise is illegal, immoral or contrary to public policy. Nor should it contain anything infringing copyright &/or intellectual property rights of any person(s).
comments powered by Disqus