India’s Reserve Bank (RBI) is about to clamp down on gold sales from banks to customers. Rising bullion imports have been weakening the rupee and “adding pressure to the current account deficit,” says the RBI.
Some experts believe the RBI’s attempt at market manipulation will merely increase the black market gold prices and speed up the decline of the Rupee when compared to other assets like gold and silver.
Banning gold sales to customers will do little to restore consumer confidence in the Rupee. Since last August, the Rupee’s value has fallen by at least 30 percent due to the euro zone sovereign debt crisis.
According to the Business Standard:
“Banks were allowed to sell gold by importing it to fight the excess dollar flows. By the same logic, the measure should be reversed now as we are at the opposite end of the spectrum. It was a temporary measure, which unfortunately was made permanent by banks,” a top RBI official said.
In its recent interactions with bankers, the central bank sounded its discomfort over the practice of banks pushing gold coin sales and asked them to go slow. However, banks have not stopped the practice of incentivising their staff to push gold sales, as they earn a margin of Rs 100-150 per gramme of gold sold.
Since 2011, gold and silver imports have climbed up by about 44.4 percent (according to data recorded at the end of March). India currently stands as one of world’s biggest gold hoarders – China and India are neck-in-neck – as of late, importing 969 tonnes of the precious yellow metal thus far this year. Gold coin sales at the central bank increased by 33% last year as well.
Central bankers aruge that this is a huge concern as it leads to major account deficits as investors turn to gold as oppposed to the more volatile fiat, Keynesian currencies.
Banks are estimated to make a profit of Rs 150 crore at a 3% of margin from sales of gold coins. But the Reserve Bank is of the view that the sale of gold coins is not a bank’s core business and hence plans to phase it out.
There is another view that the role of banks is to convert savings into investment and promote economic activity. Selling gold coins therefore is not in line with the role of banks. However no decision has been taken so far.
The Governor of RBI, D. Subbarao, formed a committee for the sole purpose of evaluating the culprit behind the rising gold imports. Subbarao would now like to use those findings in order to stop the influx of gold and stabilize the Rupee instead.