The decision of the central bank to restrict banks to importing gold
on a consignment basis only to meet the needs of exporters of gold
jewellery will deal a blow to many domestic jewellers, especially small
ones, as a majority of the imported gold is used to make ornaments for
use in the local market.
On Friday, in the annual monetary policy
for fiscal year 2014, the Reserve Bank of India (RBI) said banks can
import gold only to meet the genuine needs of exporters of gold
jewellery,Home energy monitor
implying that imported gold cannot be used to make ornaments for
consumption in the domestic market. The central bank also restricted the
facility of loans against gold coins per customer to gold coins
weighing up to 50 gm.
RBI’s proposal, yet to be notified
officially, is aimed at curbing the import of physical gold, which,
along with crude imports, have been putting pressure on India’s current
account deficit.
The deficit touched a record high of 6.7% of India’s gross domestic product (GDP) in the third quarter of the year ended March.
In
the 12 months ended December, total gold demand in India was 864.2
tonnes, down 12% from 986.3 tonnes a year earlier, according to the
World Gold Council (WGC).
India is the largest importer of gold and more than half of the imported gold is used for wedding ornaments, according to WGC.
Only 20% of the ornaments are exported,Home energy management
gold industry officials and bankers said. Unlike other countries, India
has a liking for the yellow metal more due to its linkages with
tradition rather than for mere investment.
RBI curbing gold
imports will mean that domestic jewellers will have to recycle old
ornaments once they run out of stock, jewellers said. “This will create
major issues to us as the availability of gold will be limited,” said
P.P. Jose, executive director at Joyalukkas India Pvt. Ltd, a
Kerala-based jewellery chain with 85 outlets around the world.
A
central banker, on condition of anonymity, said jewellers can use the
domestic gold reserve and even sell jewellery made of gold of lesser
purity. “Why should banks import gold on their behalf?” he asked.
Some jewellers said the restrictions might not have a major impact on their businesses as there are other ways to import gold.
“The restrictions have been imposed only on consignment-based imports.
But there are other ways to import gold, like importing it by paying a
fixed price or taking it on loan,” said Mehul Choksi, Power monitor managing director at Gitanjali Group. “I don’t see much of an adverse impact of this measure.”
Smaller jewellers do not share this optimism.
The new rules will also impact the sale of gold coins by banks, bankers said.
“There
won’t be gold available any more as gold import will be permitted only
to meet the needs of exporters. Coin sales will stop,” said the chief
general manager at a large state-run bank, who looks after the sale of
gold coins. He declined to be named.
A few state-run banks,
including State Bank of India, offer gold deposit schemes, under which
customers pledge ornaments and receive money in return with interest
amount. Banks melt such ornaments and make coins, which are then sold to
the public. Banks also offer imported gold coins to customers. On
maturity, the customer can take back the gold or equivalent money.
An
official with a private bank said banks will have to restrict the sale
of gold coins to below 50 gm. Also, the restriction to import gold only
for the export of jewellery could change the pricing dynamics for banks,
the official said, requesting anonymity.
“We currently sell in
denominations of 5 gm to 100 gm, which will have to come down. Also,
when we import gold from other banks, we do not pay them upfront but pay
them as and when we sell the imported gold. This will not be allowed
from now, which means it could become too expensive for banks to pay,
making the business unviable,” the official said.
Bankers said
they will seek clarifications from RBI as early as next week on the
guidelines on gold, citing its repercussions in the market.
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