To detract investors from gold investments, they could be offered the option of inflation-linked returns through inflation-indexed bonds, according to Deepak Mohanty, Executive Director, Reserve Bank of India.

While oil has been a major component of India’s imports, the sharp increase in demand for gold has put an additional pressure on the current account deficit (CAD), Mohanty said at Bhubaneswar.

CAD arises when a country's total imports of goods, services and transfers’ is greater than exports. A widening CAD exerts downward pressure on the rupee, making imports costly.

During 2008-09 to 2011-12, on average, the net gold imports stood at about 2 per cent of GDP, almost double the level recorded during 2004-05 to 2007-08.

The traditional motive of gold demand for jewellery, gold seems to have become a safe investment asset and a hedge against inflation as is observed in other advanced economies.

Mohanty felt that dematerialisation of gold like any other financial product can reduce its physical imports.

Pointing out that in 2011-12, the current account deficit widened to a record 4.2 per cent of GDP, Mohanty said Reserve Bank’s own research shows that economy can sustain CAD of about 2.5 per cent of GDP under a scenario of slower growth.

There is a need to reduce imports and boost merchandise exports to bring the CAD to sustainable levels.

In the case of oil, the senior RBI official said the country needs to become more energy efficient to reduce its dependence on oil imports.

Stepping up of production of electricity could reduce oil demand from backup generation systems. Moreover, the domestic pricing of oil should be aligned further to the international prices to rationalise oil consumption.

Given the global uncertainties and volatility in capital flows, the resilience of capital account needs to be further enhanced by encouraging foreign direct investment (FDI) inflows, said Mohanty.