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India‟s love for gold and the government‟s efforts to curb it – a timeline
By Aditya Kalra JUNE 28, 2013

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CHIDAMBARAM | CURRENT ACCOUNT | DEFICIT | GOLD | GOVERNMENT | INDIA | RBI

Google Trends shows that the term “current account deficit” is among top searches from India in 2013. Add “gold” as a comparative keywordand the searches for the commodity Indians love are far higher. Indians buy gold for everything – investment, gifts, wedding ceremonies and auspicious days. But of late, this has become a pain for policymakers. As the Indian economy struggles, policymakers say that high gold imports and the rising current account deficit are big concerns. India‟s number one import, crude oil, and gold, it‟s number t wo, hurt the current account deficit. While crude oil is necessary, gold is not, especially if we believe our finance minister. “I‟m hoping that the people of India will heed my appeal and will not demand so much gold,” Finance Minister P. Chidambaram said in March, soon after he claimed during his budget speech that India‟s „passion for gold‟ is responsible for the high current account deficit. In recent months, falling gold prices prompted heavy gold buying in the world‟s biggest gold consumer. The result: India imported around 162 tonnes of gold in May, more than the 142.5 tonnes imported in April, and high enough to worry Indian policymakers. In June, Chidambaram spoke up again: “I would once again appeal to everyone: please resist the temptation to buy gold”. The government and the Reserve Bank have taken many steps this year to reduce India‟s appetite for gold. Here‟s a timeline of key events in 2013: Jan 21: The government raises its import duty on gold by 2 percentage points to 6 percent. Industry officials say they expect only a moderate drop in demand. Jan 22: India targets raw gold in its second duty hike that week. The government more than doubles its duties on gold alloy.

Jan 30: The government says it does not plan additional taxes or curbs on imports of gold as it waits to see the impact of

recent tax hikes. Feb 6: The RBI says it could limit gold imports by banks i n “extreme circumstances” and puts forward measures to help rein in purchases. Feb 28: The government keeps the gold import duty unchanged in the annual budget even as industry experts say they think the duty will be raised. April : Gold prices in India fall sharply to about 25,500 rupees/10 grams (around $425/10 grams). Such levels were not seen in the last 18 months. There is global selling as Cyprus‟ plan to sell bullion reserves, fears of the U.S. Fed ending its stimulus, worries of central bank sales and investors dumping gold push prices down. May 3: The RBI proposes to restrict gold imports on a consignment basis by banks only to meet the genuine needs of jewellery exporters, adding that the guidelines will be issued by May 31. May 13: Lower prices mean more buying. Data show that India‟s gold and silver imp orts shot up 138 percent on year in April as customers took advantage of lower prices. The data shocks the government. The RBI steps in, brings into effect previously announced restrictions on banks importing gold. May 20: Chidambaram says India will take more steps if necessary to curb gold imports. May 27: The RBI says banks will not be allowed to give loans against units of gold exchange-traded funds and gold mutual funds.

June 3: India imported around 162 tonnes of gold in May, a finance ministry official says. This was much more than expected. June 4: The RBI takes tougher measures, saying domestic jewellers can only buy gold on a cash basis. By doing this, the central bank makes the overseas purchase of gold a cash and carry business. Shares of jewellery makers fall. June 5: Another gold import duty hike. The government increases the import duty on gold to 8 percent from 6 percent. A government official says the next day that it might take more steps to curb gold inflows. June 21: Reliance Capital abruptly halts gold sales and investments in its gold-backed funds, saying it is ”committed to support all policy objectives of the government and the RBI”. June 24: India‟s biggest jewellers‟ association – All India Gems and Jewellery Trade Federation – asks members to stop selling gold bars and coins, which makes up about 35 percent of their business. June 25: The RBI tells rural regional banks that they can no longer provide loans against gold jewellery and coins.

June 27: The RBI rules out any credit transactions for gold imports unless they are intended to make jewellery for export.

Restriction in gold imports may lead to increased smuggling
Sutanuka Ghosal, ET Bureau Jun 6, 2013, 10.54AM IST

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Rupee| RBI| Gold| bullion traders| bullion


(Jewellers and bullion traders…)

KOLKATA: The government's latest measures to restrictgold imports may lead to an increase in smuggling. Jewellers and bullion traders say that nearly 200 -250 tonne of gold may be smuggled into India this year following the Reserve Bank of India's moves to check the metal's shipments. Talking to ET, Bachhraj Bamalwa, director of Nemichand Bamalwa, said, "According to Thomson Reuters GFMS report, India smuggled 100 tonne of gold in 2012. Market sources have indicated that this year the figure will increase to 200 -250 tonne ." Earlier this year, the government raised the import duty on gold and the method of calculation was changed to ad-valorem. Now the Reserve Bank of India has asked banks, nominated agencies and star trading houses not to import gold on a consignment basis for domestic sales. RBIhas also insisted on 100% cash margin for letters of credit. The central bank has curbed credit by insisting that imports will be on 'documents against payments' as against the earlier norm of 'documents against acceptance'. The restrictions were invoked after imports soared to 162 tonne in May from 142 tonne in April following weak international prices.
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Bamalwa said, "Currently, smaller jewellers are paying a premium of Rs 500-600 per 10 gram for spot delivery of gold. Even then, gold is not available. This new set of rules will discourage banks to import gold and therefore there will be a shortage in the market. This will push up premiums." He added the import duty, the value-added tax and premiums for spot delivery would only lead to a rise in smuggling. Gold traders indicated that retail prices may go up because the landed cost of the metal will increase.

Though the government tried to control the fall in rupee by introducing new strictures on gold imports on Tuesday, the slide could not be arrested. On Wednesday, it further depreciated to close at 56.72 against the dollar making the metal costlier. In the Indian market, the spot price of gold was hovering around Rs 27,200 per 10 gm due to a weak rupee. In the last fortnight, demand has dropped by 10%-14% across India. Haresh Soni, chairman, All India Gem and Jewellery Trade Federation, said the new restrictions will dampen gold demand. "There is uncertainty in the market due to thes erestrictions. Domestic jewellers will have to pay upfront to the bank which at times become difficult for them. Moreover, they will have to place orders with the banks in advance. If a sudden demand emerges due to falling prices, jewellers will not be in a position to meet it instantly. They will have to wait till banks provide the metal." Vinod Hayagriv, MD of Bangalore-based C Krishnaiah Chetty & Sons, pointed out that money bags can hoard gold through outright purchase. "They will ask for huge premiums making gold costlier. And that will not help address the current account deficit. The government should not allow unregistered bullion dealers," he said.
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RBI imposes fresh restrictions on gold imports
Monday, Jul 22, 2013, 20:35 IST | Agency: PTI As per the new norms, all banks and authorised agencies will have to ensure that at least 20 per cent of the imported gold is made available for exports and a similar amount is retained with the customs.

In yet another step to contain the current account deficit, the Reserve Bank today imposed restrictions on gold imports by banks and other authorised agencies. As per the new norms, all banks and authorised agencies will have to ensure that at least 20 per cent of the imported gold is made available for exports and a similar amount is retained with the customs. "It shall be incumbent on all nominated banks/nominated agencies to ensure that at least one fifth of every lot of import of gold (in any form/purity including import of gold coins/dore) is exclusively made available for the purpose of export," the RBI said in a notification. It further added that such imports should be linked to financing of exporters by the nominated agencies. The banks and other entities will also be required to retain 20 per cent of the imported quantity of the gold in customs bonded warehouses. The restrictions are meant to contain gold imports, which in addition to oil, is putting pressure on the current account deficit that soared to a record high of 4.8 per cent in 2012-13. The RBI and the government had earlier imposed other restrictions on import of gold to check CAD.

RBI imposes fresh restrictions on gold imports
Monday, Jul 22, 2013, 20:35 IST | Agency: PTI As per the new norms, all banks and authorised agencies will have to ensure that at least 20 per cent of the imported gold is made available for exports and a similar amount is retained with the customs.

In yet another step to contain the current account deficit, the Reserve Bank today imposed restrictions on gold imports by banks and other authorised agencies. As per the new norms, all banks and authorised agencies will have to ensure that at least 20 per cent of the imported gold is made available for exports and a similar amount is retained with the customs. "It shall be incumbent on all nominated banks/nominated agencies to ensure that at least one fifth of every lot of import of gold (in any form/purity including import of gold coins/dore) is exclusively made available for the purpose of export," the RBI said in a notification. It further added that such imports should be linked to financing of exporters by the nominated agencies.

The banks and other entities will also be required to retain 20 per cent of the imported quantity of the gold in customs bonded warehouses. The restrictions are meant to contain gold imports, which in addition to oil, is putting pressure on the current account deficit that soared to a record high of 4.8 per cent in 2012-13. The RBI and the government had earlier imposed other restrictions on import of gold to check CAD.

Restricting gold supply will not be effective: P.R. Somasundaram
K.R. Balasubramanyam TAGS: Gold Last Updated: August 1, 2013 | 18:22 IST

| CAD | RBI | Chidambaram | World Gold Council

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Indians' love for gold weighs heavy on the economy Gold import surges in July, curbs to continue

World Gold Council's India Managing Director P.R. Somasundaram

Among India's major imports, gold irks Finance Minister P. Chidambaram considerably. Its sizeable flow into the country contributes significantly to increasing the already-stretched current account deficit. Indians are the largest buyers of gold in the world. With the rupee hitting a record low, an anxious government and the Reserve Bank of India have been taking measures to rein in gold imports. World Gold Council's India Managing Director

P.R.Somasundaram, however, tells K.R. Balasubramanyam that the demand for gold may rise to anything between 865 and 965 tonnes in 2013 compared to 864.2 tonnes in 2012. Since most of India's gold demand is met through imports, it implies that, despite the restrictions, India might see higher gold imports in 2013 than the 860 tonnes in 2012. Edited excerpts: Where is gold import headed? In India, gold imports are headed for record levels in the second quarter of 2013. We anticipate 300 tonnes to 400 tonnes of imports in the second quarter, which would be almost half total imports of last year. We expect as much as a 100 per cent year-on-year increase. This is driven by India's love of gold and acceptance of gold-backed solutions. How do you view the recent government measures to reduce gold imports? Curbing supply may have a short-term benefit, but will not reduce demand, which might be met by unauthorised channels. This will not be positive for either the economy or society. The demand for gold is very innate in India. The nature of the demand at the retail level is such that restricting supply will not be effective in the long run. It is likely to lead to non-transparent price premiums in the market. How do you see demand for the next three months leading into the festival season? And how does this compare against the June demand? India's love for gold is timeless. Regardless of market sentiments, retailers prefer buying physical gold on auspicious days. As it happens there are 20 per cent more such days this year as compared to 2012. With the wedding and festive season in last quarter of 2013, we believe the demand outlook remains strong and the long-term fundamentals of the gold market stay intact. Our market update report that was launched in May this year indicates that the demand for gold will be higher in the post-monsoon season. Despite the price fall in April, sentiment towards gold in the two largest markets of India and China is still extremely positive. Seventy per cent of consumers in India and China expect the price to stay stable or to rise in the next 12 months. Looking at the trend this year, we expect gold demand to be around 865-965 tonnes for 2013. How do gold imports affect the Indian economy? Globally, India is the largest consumer of gold. Most of the demand is met via imports. While we are aware that a large current account deficit is unsustainable and needs to be checked, there are a number of factors which influence the current account deficit in India of which gold is one. Demand for gold is driven by a diverse range of factors. These should be taken into account in India. Addressing this demand by curbing supply will boost unauthorised channels leading to undesirable consequences for the economy. How should the current account deficit be kept within reasonable limits? India is a significant stakeholder in the gold market holding over 20,000 tonnes. It is in the hands of millions of people. Policy direction should view gold as a strategic asset for India and its citizens. We support the objective to monetize the nation's gold stock to boost economic growth. As the market development authority for gold, we understand the investment benefit gold offers in India. We also understand its role as a risk mitigation asset. It is our endeavour to drive conversations around gold demand and to create new and innovative gold based solutions. Gold has a special status socially, culturally and economically in the minds of Indians. In the current situation we see an increased need to monetise the existing and future stock of gold. We work towards bringing capital into the financial system for productive purposes. We believe that by enhancing the efficiency of the market with different measures - standardisation of gold, development of central utility functions, investment in infrastructure, etc - we will be able to drive the demand for gold in the long-term as well.

India's gold import bill has risen eight times in the last five years. Is the RBI taking measures to bring imports down? We understand that part of the rationale for seeking to curb gold imports is to reduce the current account deficit. We recognise that a large current account deficit is unsustainable and needs to be checked. However there are a number of factors which influence the current account deficit in India of which gold is one. Demand for gold, whether in the form of jewellery or investment (bars and coins), is driven by millions of individuals investing as part of their household savings. People buy gold as a long-term investment to protect their wealth. Gold has huge significance socially, emotionally and economically in India. Addressing this demand by curbing supply may have a short term benefit but this demand will be met by the grey market (smuggling). It will not be positive for either the economy or for society. Gold holding with the ETF (Exchange-Traded Fund) is seeing a rapid decline. Your views. The first half of 2013 saw strong consumer demand for gold in the form of jewellery, bars and coins, particularly in Asia. However there was a significant outflow in ETFs due to price drop and higher volatility. Demand in the ETF market mirrors demand in the physical market. We should see Indian investors returning to ETF soon.

By Rafael Nam and Shamik Paul MUMBAI | Wed Aug 14, 2013 11:10pm IST MUMBAI (Reuters) - India imposed restrictions on foreign exchange outflows and gold imports on Wednesday in a new attempt to prop up the rupee, as a spike in inflation added pressure on policymakers to curb a crippling external deficit. Finance Minister P. Chidambaram also reiterated his pledge to narrow the current account deficit - the main source of the rupee's weakness - to 3.8 percent of gross domestic product this fiscal year and said the currency would not be allowed to slide into "free fall". The Reserve Bank of India's latest steps to support the currency, which has plumbed record lows against the dollar, included cutting the amount of overseas direct investments allowed by Indians. Those investments reached $3.2 billion in July, according to central bank data. Separately, the central bank banned imports of gold coins and bars, which constituted about 36 percent of total billion demand in India last year, and will require domestic buyers to pay cash for the yellow metal, among other measures. "This is obviously an extreme action, but these are extraordinary times and require extraordinary measures," said Sujan Hajra, chief economist of brokerage Anand Rathi in Mumbai. The steps came as data showed the headline inflation rate jumped above the central bank's target range of 4 to 5 percent in July for the first time since March, making it even harder for the bank to refocus on supporting India's slowing economy. The Indian authorities fear continued falls in the rupee will exacerbate the current account deficit in the short term, deter investment and further curb growth in Asia's third-largest economy. Central bank action to tighten rupee liquidity in mid-July and other steps have failed to halt the slide in the currency, which set new record lows on August 6. Chidambaram sought to address scepticism in financial markets since he first announced on Monday his target to cut the current account deficit to $70 billion, or 3.8 percent of GDP, from a record high 4.8 percent in the year ended in March. Proposals announced on Tuesday to raise duties on gold and silver imports in a bid to curb demand have also failed to convince investors, who believe stronger measures are needed. "I make a commitment on the current account deficit on behalf of the government. We will leave no stone unturned to contain the current account deficit at about $70 billion," Chidambaram told lawmakers on Wednesday. "We cannot allow the rupee to go into a free fall." The partially convertible rupee slipped to 61.45 per dollar on Wednesday. It is down 2.5 percent since the RBI launched its major support effort on July 15, which included raising short-term interest rates. However, the RBI on Wednesday also sought to ease some of the liquidity constraints at banks by exempting some requirements on the types of cash and government securities lenders must keep with the central bank. Chidambaram also said that the central bank's mandate must include growth and employment, while Arvind Mayaram, economic affairs secretary, told reporters that any measures put in place would not be permanent. "As and when we believe that the speculative pressure on the rupee is easing and the rupee is finding its stable environment, then the Reserve Bank of India and the government of India will revisit these restrictions and take an appropriate decision," Mayaram said. Traders had previously criticised mixed signals from government and central bank officials, saying it raised doubt about their resolve and contributed to the rupee's weakness. UGLY INFLATION

India's headline inflation rate, measured by the wholesale price index, accelerated to 5.79 percent annually in July from 4.86 percent in June, data showed on Wednesday. With fears growing that India is headed into a phase of slowing growth and high inflation, 10-year bond yields surged to as high as 8.55 percent, their highest in more than a year. Analysts said the bad news on inflation, particularly on prices for imported oil prices, was due in part to the rupee losing 12 percent against the dollar since the start of May and higher food prices. "The July print for headline inflation is very ugly," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai. "Despite an acute slowdown in domestic demand, the manufacturing prices have remained elevated due to rising input costs on account of massive depreciation of rupee." The need to bolster confidence has become more pressing. Foreign investors have sold a net $11.6 billion in debt and equities since late May, a bad omen given markets could weaken more when the U.S. Federal Reserve rolls back its monetary stimulus. Ultimately, analysts say Prime Minister Manmohan Singh's minority government will need to implement bolder reforms to restore the economy, notably by improving the investment climate and expediting infrastructure projects. Whether they can do so remains in doubt, given the government faces political gridlock ahead of general elections due to be held by May 2014. (Additional reporting by Subhadip Sircar, Swati Bhat, Abhishek Vishnoi & Siddesh Mayenkar in MUMBAI and Manoj Kumar & Rajesh Kumar Singh in NEW DELHI; Writing by Rafael Nam; Editing by Simon Cameron-Moore and Susan Fenton)

RBI's gold import restrictions: Right diagnosis, wrong treatment
Mahesh Nayak Last Updated: June 6, 2013 | 11:21 IST TAGS: gold imports

| CAD | current account deficit | RBI | Reserve Bank of India | gold demand in India

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RBI widens restrictions on gold imports Import duty on gold hiked to 8%

Mahesh Nayak

The Reserve Bank of India (RBI) has correctly diagnosed the root cause of both the rising current account deficit (CAD) and the weakening of the rupee: India's insatiable appetite for gold. But the same cannot be said of the treatment it has chosen to cure the ailment. It has imposed restrictions on gold imports, the largest item on India's import bill after crude oil. Market experts feel the restriction will reduce gold imports by about 10 to 15 per cent. This may not necessarily impact the demand for gold. Also, retail investors in gold, who are responsible for the gold consumption during the festival and wedding seasons, will largely depend upon jewellers for their purchases. Exporters, who order the quantity of gold requirement through banks will continue to get as much gold as they want provided they use the Letter of Credit route and pay for margins ahead of delivery. How will the curbs affect gold prices? "The situation will depend on the time-frame," says Naveen Mathur, Director at Angel Broking. "In the short-term, the trend in gold prices will be determined largely keeping in mind the monetary policy developments in the US. With expectations of a pullback in bond purchases, the Dollar Index is expected to strengthen, thus leading to pressure on gold prices. An easy US monetary policy has been a key factor in pushing gold prices higher and a reversal of the same would cause havoc in the global markets." With gold prices coming down, demand is expected to rise. It has been seen in the past that a hike in import duty is a short-term solution. In the medium to long-term consumers come back to the market. In May 2013 itself gold imports stood at 162 tonnes, higher than the 153 tonnes clocked in the entire first-quarter of the last fiscal year. Gold imports by India stood at 860 tonnes in 2012. The World Gold Council expects the country's gold import to touch a record level at 300-400 tonnes in the April-June period. The flip side of restrictions will be increased gold smuggling and increased grey market activity. In short, the RBI's move on gold prices is expected to be limited on prices and demand, considering the variety of factors affecting gold prices internationally. An immediate reaction to the curbs has been the rupee moving up from its 11-month low, but this can't be the right way to shore up currency. Be it during the Asian crisis of 1997/98 or the Argentinean peso crisis of 1999/2002, no central bank in the world could ever control the movement of currency. With foreign institutional investments in Indian equity at historical high of over 2.5 per cent of market cap (anything over two per cent of FII investment in stocks has triggered selling), the sword of Damocles (of their withdrawal) will always hang over Indian markets which will further put pressure on the currency. Following expectations of the withdrawal of stimulus measures by the Federal Reserve, the dollar has strengthened against other currencies across the globe including the Indian rupee and any pressure in the equity markets will put further pressure on the Indian currency. Agrees Vikram Dhawan, director of Equentis Capital, who says: "Micro managing the currency is not the right approach. Our only hope is a macro correction and a structural correction that will automatically make imports costlier and discourage demand."

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