Indian gold market liberalization seems stalled - jul - 18, 2005
Dear Crowne Gold Clients;
Sean Trainor, President of Crowne Gold, Inc.
Gold liberalisation measures are key to India
By Sangita Shah
Financial Express, New Delhi
Monday, July 18, 2005
India is sitting on a "gold" mine and it has the potential to be
world's largest gold trading center. Everybody acknowledges this,
the finance and commerce ministries, the Reserve Bank of India
(RBI), the commodity exchanges, so on and so forth. Not to mention
the bullion traders and jewelers.
India has unsatiable penchant for gold. It has been proved time and
again. Every quarter the GFMS and World Gold Council reports have
been substantiating the facts.
However, little is being done to open up gold trading. While
permissions are in place to import gold through nominated agencies
including banks, exports are not free and lots remain to be done.
The first step towards liberalizing was taken by the then commerce
minister of the NDA government when he presented Export-Import trade
policy, now fondly re-coined as foreign trade policy, in March 2003.
The minister had sought to allow free import of gold and had made an
announcement in this regard with a caveat "subject to regulatory
approval." And the regulator RBI made sure that it flexed its arms.
RBI just poured cold water over the commerce minister's proposal.
Reasons were best known to the regulator. Repeated attempts by media
to find out the grounds for such an approach went in vain. Now again
there are talks of liberalizing gold. Hope this time around it
doesn't turn out to be a damp squib. The new gold policy is expected
in September is likely to address a variety of issues—ranging
from setting up of special zones for gold trade to concerns relating
to launching gold exchange traded funds.
Earlier, the government was due to come out with a new and
comprehensive package for the bullion trade in April 2005, but again
nothing much happened. The ministry of commerce had set up a
committee to formulate the gold policy and it is learned that
permission for banks to offer gold savings accounts, permission to
non-bullion banks -- those banks that are not designated to import
gold—to trade in spot gold etc, is being contemplated. Permission
for importing gold directly instead of routing it through nominated
agencies is also on cards.
If these decisions are put in place, it will pave the road for
Indian gold trade to be more on par with international trade. Let us
take a look at "whats" and "whys" that are plaguing the free trade
of gold in the country. India is one of the largest consumer and
importer of gold and one of the largest exporter of jewellery. But
unfortunately India is not a center of gold trade. Dubai has
cornered the status of "City of Gold." Despite largest consumer of
gold jewellery, India has not been able to provide reliable trade
structure with regard to quality control, refiner's accreditation,
liberal import and export of gold.
Currently, there are distortions often noticed in the ruling prices
in domestic bullion market being at a discount to imported landed
cost arising out of the interest rate arbitrage opportunities
existing between the higher domestic rates of interest and the lower
global US dollar interest rates of interest, given particularly the
current costs of hedging rupee/dollar forward rates.
This could be resolved through various options. Allowing banks and
the earlier canalizing agencies (pre-changes to the EXIM policy) to
fund the gold imports through foreign currency borrowings, deposits,
Such borrowings could be over and above the ECB borrowing limits
otherwise stipulated for these entities.
The advantage in this approach is two-fold.
Firstly, the oversight is over a limited group of institutions/banks
who are amenable to rigorous oversight by RBI.
Secondly, allowing them to fund these imports in foreign currency
(particularly US dollar) would neutralize the interest rate
arbitrage that the domestic importer today enjoys.
These canalizing agencies then will be able to fund the imports
exactly as the foreign consignor/supplier would. In fact, given
their stature, the risk premium that would be charged by the foreign
supplier/consignor would be lower (than that charged to the local
importer -- except where such imports are under LCs, in which case
the impact would be neutral).
The option to allow these canalizing agencies to begin with to re-
export gold in primary form imported by them but not sold, say
within a period of 30-45 days, may also have desired impact.
During this period, it could be stipulated that the gold ought to be
in custom bonded warehouses. This will enable two way freer movement
of gold (of course only through the canalizing agencies) which would
act to shrink the arbitrage.
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