India May Prohibit Gold Coin Sales by Banks

June 27, 2012 at 18:34

truthing

The Reserve Bank of India is likely to clamp down on gold coin sales by banks, amid rising bullion imports adding pressure to the current account deficit and weakening the rupee.

The Banking Regulation Act does not allow banks to trade in commodities and they play the role of a financial intermediary. This norm was relaxed in the pre-2008 era when the country saw a dollar influx that resulted in a sharp appreciation of the rupee. To sterilise dollar inflows, banks were allowed to sell gold, as they imported the yellow metal. The measure was temporary.

“Banks were allowed to sell gold by importing it to fight the excess dollar flows. By the same logic, the measure should be reversed now as we are at the opposite end of the spectrum. It was a temporary measure, which unfortunately was made permanent by banks,” a top RBI official said.

The rupee has depreciated 30 per cent since August amid the sovereign debt crisis in the euro zone, which made investors flee to safer havens. Weakening macroeconomic fundamentals like the fiscal and the current account deficit have resulted in investors pulling out from the Indian market.
In its recent interactions with bankers, the central bank sounded its discomfort over the practice of banks pushing gold coin sales and asked them to go slow. However, banks have not stopped the practice of incentivising their staff to push gold sales, as they earn a margin of Rs 100-150 per gramme of gold sold.

Gold and silver imports were around $61.5 billion as of March-end — a growth of 44.4 per cent during 2011-12 as against 43.5 per cent in 2010-11. In 2011 India imported 969 tonnes of the yellow metal compared to 958 tonnes in the previous year, according to data compiled by the World Gold Council. In value terms, imports in 201-12 were around $60 billion. However, according to data released by the government, gold and silver imports in April and May 2012 came down sharply to $4.3 billion, compared to $9.2 billion last year.

RBI Governor D Subbarao had said earlier that the central bank was looking into the issue of rising gold imports and formed a committee headed by an executive director-rank officer to examine the reasons.