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It is high time that policy makers come out with a robust 'Strategic Road Map to hoarding and storing of Gold' and think of ways and means to procure this commodity rather than spike import duties and thereby err..

20 Nov 2012

By Rakesh Neelakandan
The Reserve Bank of India, the nation's central bank has struck: in a move deemed to address the current account deficit of the nation, the Bank has notified the banks under its clutch not to give away loans for gold purchases.

“...no advances should be granted by banks against gold bullion to dealers/traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion. In this context, the significant rise in imports of gold in recent years is a cause for concern as direct bank financing for purchase of gold in any form viz., bullion/primary gold/jewellery/gold coin could lead to fuelling of demand for gold for speculative purposes.” the Bank said in a notification.

India completely relies on imports of gold and with nation's foreign exchange reserves depleting and current account deficit climbing, the RBI could not have acted better, one may think. (In 2011, the nation imported a record 969 metric tons of gold, up from 958 tons in 2010.) So much for this gold frenzy!

Now, we know Indians generally are keen hoarders of bullion. Indian households may hold many 1000 tons of gold in segregated form; reliable statistics to this effect are not available.

The question is, in the era, where Chinese identify gold as a strategic commodity, is the Indian central bank directive a prudent one?

Currently at about 1054 tons, gold just accounts for 1.6% of Chinese $3.2tn foreign exchange reserves. In case of US, the figure stands at 70% of holdings. The US has the biggest economy in the world, followed by China.

“As gold is a currency in nature, no matter if it’s for state economic security or for the acceleration of renminbi internationalisation, increasing the gold reserve should be one of the key strategies of China.” the Financial Times said in a translation of Sun Zhaoxue article. [He is the head of China National Gold Corporation.]

The article argues that US is trying to create the impression that gold is useless so that dollar retains its value.

“Although the global financial crisis originated in the US, the crisis hasn’t shaken the dominant status of the US dollar in the world and American assets are not shrinking because of dollar depreciation. America’s 8,133 tonnes of gold reserves plays an important role in that.” Zhaoxe article said.

Sun argues that China should view gold as a “strategic resource as important as petroleum energy”

China is also the world's biggest gold producer and has maintained the top spot for five years. China is also on an acquisition spree in gold reserves buying out mines in different parts of the world.

And it thinks that the hoarding of gold by its citizens would add to the economic resilience of the country.

So need the RBI re-think its policy? Chances are less that the said policy in current form would make India shine.

It is high time that policy makers come out with a robust 'Strategic Road Map to hoarding and storing of Gold' and think of ways and means to procure this commodity rather than spike import duties and thereby errect barriers; not to speak of killing demand.


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