India’s central bank, the Reserve Bank of India (RBI), has found a novel way of tackling the nation’s gold import deficiency without affecting the Current Account Deficit (CAD). It has decided to swap old gold, 557 tons worth some $21 billion, in its reserves, with new gold, with the aim of standardizing its yellow metal stock.
The move is expected to have fiscal benefits. The increase in domestic gold supply will not put pressure on the CAD, which, at present, is under stress due to rising crude oil prices in the wake of the Iraq conflict. It would also ease India’s balance of payment. In order to check the rising CAD, the Indian Government had raised import duties, while the RBI had imposed curbs on gold imports, in addition to prescribing pre-conditions for inward shipments of the yellow metal. Smuggling gold into India has become a healthy black market, but that is likely to come down once domestic supply increases.
As part of the move to swap its gold, the central bank has asked nominated banks, including the State Bank of India to submit quotes. The chosen bank will import gold on behalf of the RBI and subsequently the metal would be swapped. The bank holds the 11th largest gold reserve in the world.
According to a report in the Business Today, the RBI will exchange “relatively impure gold,” including some dating back to the pre-independence (1947) era, and get the equivalent worth of purer yellow metal.
When the standardization operation was over, the new gold acquired will be delivered to its overseas custodian, the Bank of England. The entire exercise will take place through book entry and without any cash exchanging hands, sources said.
This is not the first time that the RBI has made such a move. It had parked gold abroad during the 1991 financial crisis, and in 1998, before Russia’s default and devaluation caused a meltdown across emerging markets.
India’s gold imports had come down by 72 percent to US $2.19 billion in May due to restrictions imposed by the government on inbound shipments of the precious metal.
Rising gold and petroleum imports had led to the CAD touching a historic high of 4.8 percent in 2012-13 due to the excess of foreign exchange outflows over inflows. India had paid US $54 billion to import 1,017 tons of gold that year. A high CAD puts pressure on the currency, leading to inflation.
Currently, Indian banks import gold for jewelers, and then they can only re-import another batch if 20 percent of the last batch has been exported. There’s a 10 percent duty on imported gold. MetalMiner has been following the gold import duty story on a regular basis.