Financial Alternative to Gold Considered

July 13, 2012 at 04:44

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The Reserve Bank of India (RBI) is planning to introduce financial products with returns that match the earnings from gold investments.

The move is aimed at discouraging gold imports. This would help reduce the current account gap. A committee has been set up by the central bank to devise alternative investment avenues for retail investors

“Gold imports have been a substantial part of the current account deficit. It is being looked at (seen) what best can be done,” Anand Sinha, deputy governor of RBI, told reporters on the sidelines of a seminar organised by the Indian Chamber of Commerce here on Thursday.
“Import is one aspect. The other aspect is gold, already in the country — whether we can bring it out to satisfy the demand … (or) devise financial instruments which can mimic the return on gold. Several proposals are there. There is a committee looking into all these aspects.”

Sinha did not offer details on the types of financial products the banking regulator was looking to introduce.

In the Financial Stability Report released last month, RBI had expressed concern at banks’ import of gold coins for retail sales, as investment in the yellow metal by households will affect availability of financial sector funds.

“Banks’ import of gold coins for retail sale to households has been a matter of concern. It has risen from just one per cent of total imports by banks in 2009-10 to 3.8 per cent in 2011-12,” RBI said in the Report.

Quoting World Gold Council data, RBI said as much as 23 per cent of all gold imported is for investment purposes in India and said even its use in jewellery at 75 per cent has an investment element for households. Market players said it is difficult to guess the type of financial instruments that RBI will introduce to match the returns on gold investments.

“It is difficult to match the returns on gold. Besides, a lot of black money is hoarded in the form of gold. Even if RBI launches some financial instrument, it is difficult to popularise, as then the investments will have to be made through official channels,” said an industry player.

Some suggested RBI might look to strengthen financial products such as e-gold, gold futures and gold exchange traded funds or inflation indexed bonds to curb import of physical gold.

The current account gap widened to an all-time high of $21.7 billion, or 4.5 per cent of gross domestic product (GDP), in the January-March quarter from $6.3 billion in the corresponding period of previous year. The current account deficit nearly tripled due to higher import of oil and gold.

India imported gold worth $60 billion in 2011-12.