Gilding gold trade

When gold imports fell by over 30 per cent in April-September, it was widely believed that the yearning among Indians for the yellow metal had waned. The record $ 56.25 billion of imports in 2011-12 was, by this logic, a one-off affair. But contrary to expectations, the period from October to February have seen imports surge by almost 35 per cent, so much so that the fiscal just ended may have probably recorded only a marginal overall drop. That is certainly bad news for the country’s policymakers, concerned as they are with the current account deficit on the balance of payments that may touch an all-time-high of $ 95 billion, when official figures for 2012-13 are eventually out.

The upshot of all this is, one, Indians are not going to give up on gold purchases. They may have bought less in April-September, only to make up in the second half – and quite a lot of it, perhaps, in the anticipation of impeding customs duty hikes to control imports. Two, a significant part of their purchases are not for purely ornamental purposes; the latest World Gold Council data for October-December shows more than 40 per cent of estimated gold purchases by Indians to have been in coin or bar form. Such investment demand has largely to do with the perception of gold as an effective inflation hedge. In other words, so long as inflation remains high, gold will continue to be in demand, even if it entails negative balance of payments consequences.

To the extent ‘pure’ investment is what is driving gold buying, it is time the Government starts looking at ways to address such demand without it necessitating additional imports of the metal. For instance, the Reserve Bank of India (RBI) could conduct ‘reverse repo’ auctions of gold held by it to registered investors or ‘authorised dealers’ in gold. The quantum and the repurchase period can be suitably altered, depending on the degree of speculative fervour prevailing in the market at different points of time. If auctions in government securities perform the role of stabilising prices in the economy, a similar auction in gold can be perceived as securing stability in its external sector. The Government can, in consultation with the RBI, even encourage the likes of MMTC and the STC to conduct long-dated ‘reverse repos’ in gold, against a one-time buffer of imports. Exchange-traded ‘call’ and ‘put’ option contracts in gold is another alternative that can, likewise, be considered. The objective in all this is that people with expectations of returns from investing in the yellow metal need to not end up becoming private hoarders of physical gold, as their attempts at monetising such gains result in huge transaction costs that jewellers impose on them. The current system suffers from a serious drawback, where gold investments are virtually a one-way import street.