It will also likely impact current account deficit.
By R. Chandrasekaran
CHENNAI: The latest move by the Reserve Bank of India (RBI) to curb import of gold will likely have at least two benefits for India.
It will help bring down the trade deficit in June, as April witnessed a big jump in gold imports. The central bank’s measure will also likely to arrest the further weakening of rupee, and thus prevent a further increase in the current account deficit.
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In April, gold and silver import went up by 138 percent jump, resulting in an import bill of $7.5 billion for these two metals alone. Import of gold in May increased to 162 tones compared to 142.5 tones in April.
The lust for gold among the Indians continue because of the sluggish economy and the absence of safe alternative investment as the realty and equity markets failed to offer similar returns in the last five years. More over, the yellow metal offers a good exit route and a better bet to secure loans from the institutions during the distress.
Though the RBI has been initiating various measures to curb the import of gold, April and May witnessed significant increase in gold import. On January 21, the government hiked customs duty to 6 percent, which seemed to have had some effect as imports of gold slipped to 215 tones in the quarter ending in March from 228 tones during the same period last year, according to World Gold Council data.
However, the anticipated demand during the Akshaya Tritiya—a Hindu and Jain holiday, when many people buy gold—in May had forced importers to store gold in advance in April. The sharp fall in gold price in April also increased the appetite for the yellow metal in May, as consumers preferred to take advantage of the weak gold price. However, since then All India Gems and Jewelry Trade Federation chairman Haresh Soni was on record saying that there was no demand after Akshaya Tritiya.
Following the data for April, on May 13, the central bank came out with restrictions on gold imports on consignment basis by banks and advised banks to buy only for genuine needs of the exporters of gold jewelry. Recently, the RBI has extended the restrictions on gold imports to nominated agencies, star and premier trading houses. In fact, it had asked the nominated banks and other agencies to import gold only on full cash basis and not to encourage using letter of credit.
While the World Gold Council predicts India to import gold of 300 – 400 tones in June quarter, the initial indication suggests that India would have already imported 300 tones of gold in April and May alone. This also suggests that gold import in June could be below 100 tones.
Looking at the impact on the currency and the current account deficit, Bank of America Merrill Lynch has reportedly viewed that the recent restrictions on gold imports could provide a $5 billion to $10 billion downside risks to its fiscal year 2014 gold import forecast of $55 billion for India. The expected reduction in gold import will likely to arrest the weakening rupee any further in the immediate term.
Also in the near term, the government should be hoping that its recently announced incentives for exports, speedy approval of projects, and the Unilever’s proposed infusion of funds to buy back its shares from the Indian residents will likely strengthen the Indian currency versus US dollar. The foreign institutional investors (FIIs) pumping of funds Indian equities will also likely add strength to Indian rupee.
The curb will also likely to arrest further escalation of current account deficit for the current fiscal year. The move could also help the central bank to ponder over reducing interest rates at least by 25 basis points in their next meeting.
To contact the author, email to: rchandrasekaran@americanbazaaronline.com