NEW DELHI/MUMBAI (Reuters) - India's central bank took tougher measures to curb gold imports on Tuesday after buying soared in May and threatened to widen a current account deficit which is already at a record.
The moves could slash June imports, industry experts said, but the government continued to fret and weighed options in case the central bank's move again failed to stem the import flow.
Indians, the world's biggest buyers of bullion, swept up 162 tonnes of gold last month - at least twice normal volumes - as they tried to beat the Reserve Bank of India's last move on May 13. The buying spree started in April when global prices slid.
India's average monthly imports this year are now already nearly 104 tonnes, outstripping even the record levels of 2011 and rattling the government, which had hoped that hiking import duty by half to 6 percent in January would curb demand.
Finance Minister P. Chidambaram said on Monday imports would have to be checked and this time, the Reserve Bank acted swiftly to extend its May ban on deposit-based purchases to cover all imports apart from those used to make jewellery for export.
Spot gold fell over one percent to $1,396 an ounce as the market worried demand would be hit.
Industry experts predicted sharp falls in imports during June. Robin Bhar, senior analyst at Societe Generale in London, said June imports could be 50 to 100 tonnes while the Bombay Bullion Association said they could slide to 30-40 tonnes.
"There will be a shortage of gold ... imports will slow down at the moment, unless there is a sudden downfall (in prices)," said Harmesh Arora, director at the Bombay Bullion Association.
Domestic prices dropped sharply in April, tracking global trends and undermined by a stronger rupee. Gold futures hit a year low of 25,720 rupees per 10 grams on April 16.
Prices have partly recovered and the rupee has weakened but domestic gold futures are still trading around 27,000 rupees - roughly equivalent to $1,351 per ounce - as global spot gold prices were quoted around $1,396 per ounce.
In May, the central bank announced its plans for limiting imports early in the month, providing a two-week buying window before it implemented a ban limited then to banks importing to cover purchases by jewellers on payment of a deposit only.
The measures now aim to curb anything other than cash purchases, which could hit hard India's huge number of small, family jewellers who make up about 60 percent of the market.
Economists felt the surge in imports would not last long, linking it to lower prices. As a result, they held off raising estimates for the current account deficit (CAD), which hit an all-time high of 6.7 percent of GDP in the December quarter.
Robert Prior-Wandesforde at Credit Suisse said slowing inflation, which reduces gold's attraction as an investment, and stabilising prices should also help to reduce gold purchases.
"We expect gold demand to remain strong but not as strong as in recent months," he said. He expects the CAD to narrow to 3.5 percent of GDP in 2013/14 on improved exports.
India also embarked on sales of inflation-indexed bonds on Tuesday for the first time in over a decade and hopes to woo retail investors with them later this year.
"Clearly, with inflation coming off and the offer of inflation-indexed bonds, we are starting to see a set of factors coming together which should weaken the temptation to get ever larger quantities of gold," said Aninda Mitra, India economist at Capital Economics.
And if the measures don't work, the government has a raft of other options, including hiking import duty to 12-15 percent for a couple of months to cool buying, finance ministry officials said, although an import duty hike would be a last resort as it can simply encourage smuggling.
"There are lots of measures that people have proposed - some very clever, some moderately clever and some rude force like ban the gold imports, shoot the smuggler, lots of things like that," said Raghuram Rajan, chief economic adviser at the Finance Ministry.
"The government is not without options. I think the RBI just took options today. Let us wait and see," he added.
Additional reporting by Manoj Kumar in NEW DELHI and Clara Denina in LONDON; writing by Jo Winterbottom; editing by James Jukwey