India to take baby steps towards gold-linked products

MUMBAI Fri Feb 1, 2013 8:27pm IST

1 of 3. A salesgirl shows a gold necklace to customers at a jewellery showroom in Chandigarh November 11, 2012.

Credit: Reuters/Ajay Verma

MUMBAI (Reuters) - The RBI plans to introduce three to four gold-linked products in the next few months, in an effort to bring 20,000 tonnes of gold held in households into the banking system, but the measure is unlikely to cut bullion imports sharply, a senior official said.

India is the largest importer of gold, which is its second biggest import item after oil and contributes around 10 percent to the total import bill.

Large gold imports are a worry for the government and the RBI, with the current account deficit shooting to a record high in the September-quarter, pressuring the rupee and adding to inflationary pressures.

The Reserve Bank of India (RBI) plans to mobilise the unused gold by lending it to importers and exporters of the yellow metal, in a move it hopes will bring down the demand for physical gold.

It wants banks to encourage products linked to accepting physical gold as deposits and investing public money in gold related products, and extend loans against gold as collateral.

Indians own about 20,000 tonnes of gold, or three times the holdings of the U.S. Federal Reserve, in jewellery, bars and coins.

"Overnight there won't be any reduction in imports, but people need to be made curious about new products," the RBI official with direct knowledge said.

"The main conduits of gold imports are banks, forming 50-60 percent of the total imports and supplies to jewellers. The way banks are suffering from huge NPAs (non-performing assets), this is a good product to work on."

The RBI is likely to release its final report on issues related to gold imports and gold loans mid-next week, the official said.

The RBI is designing products that could replace physical gold demand to yield similar returns, with easy liquidity, and documentation.

Indian banks' total gold loans are worth 1 trillion rupees. Manappuram Finance and Muthoot Finance, two of the top gold loan financing institutions, together have loan books of 500 billion rupees, the official said, indicating a large business opportunity.

"The problem of gold imports can be solved only when the economy enjoys inflationary and macroeconomic stability," added the official.

Headline inflation has been above 7 percent in the last three years, prompting savers to invest in gold, stocks and real estate, which yielded higher returns compared with bank deposits.

The RBI estimates gold imports to fall by 25 percent in the current fiscal year ending March to 750 tonnes from a record of 1,079 tonnes in the previous year due to high import duty, a jump in prices, slowdown in economic growth, and a month-long jewellers' strike.

India's current account deficit would had been lower by $6 billion at 3.9 percent in 2011/12 instead of 4.2 percent, had imports grown by an average of 24 percent instead of 39 percent, the RBI said in a recent report.

(Editing by Ron Popeski)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
CommunalAward wrote:
“Gold is money, everything else is credit” –J.P. Morgan

Feb 01, 2013 10:18pm IST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Economic Pulse

REUTERS SHOWCASE

Smartphone Wars

Smartphone Wars

Google's Android One adds to Samsung's worries.  Full Article 

India Services Activity

India Services Activity

Services growth slowed in August, orders waned.  Full Article 

Money Matters

Money Matters

Banks pile pressure on liquor baron Mallya over airline loans.  Full Article 

Moody's on India

Moody's on India

India's rating seen limited by fiscal deficit, inflation - Moody's  Full Article 

Political Pulse

Political Pulse

100 days of Modi: Good for business, not so good for marginalised groups.  Full Article 

Segway in India

Segway in India

Segway’s India business pegs hope on tech-savvy Modi.  Full Article 

China Economy

China Economy

China services activity rebounds but property remains a worry.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage