Indian Bank Cracks Down on Gold Dealers

December 14th, 2016 by

India’s campaign to reduce the astronomical level of its gold imports has continued, and now one of the country’s biggest banks is getting into the act.

Cash for Gold

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There has been quite a bit of international attention paid to the slew of programs that the Indian government has developed to try and monetize the vast amount of privately held gold in the country. In other words, the state wants to incorporate this gold into the financial system—i.e. in the possession of banks—rather than letting it sit “idle” in the hands of the public.

These so-called “Gold Monetization Schemes,” or GMS, have seen very limited success. Despite aggressive efforts to bring banking services to rural Indian families, the vast majority of the country’s farming population don’t even have a bank account. Prime Minister Modi has now exacerbated this situation in what is supposedly an attempt to curb money laundering and the black market economy. Modi unexpectedly demonetized the two largest national banknotes, the 500- and 1,000-rupee notes. This has caused a cash crunch that disproportionately harms rural and impoverished Indians.

Frozen Accounts

While the currency crisis has made it harder for people in India to buy gold, this is not the only factor that’s having an impact. Earlier this year, a strike by the country’s jewelry dealers this spring certainly cut into the volume of gold purchases.

Yet, the problem of India’s trade deficit growing due to gold imports persists.

Axis Bank Ltd is the top gold import bank in India. Due to suspicions of money laundering, the bank has suspended the accounts of certain jewelers and bullion dealers. Allegedly, a pair of bank employees assisted clients in purchasing gold with the demonetized banknotes mentioned earlier. There is also speculation that these people bought gold in order to skirt paying taxes. Although the freezing of the accounts is a temporary measure while the money laundering investigation is ongoing, the decision could sharply reduce the amount of gold imported during December. Even dealers whose business wasn’t affected are concerned about receiving government scrutiny for any large transactions. Axis told reporters that the accounts are expected to be unfrozen in a matter of days.

Some estimates place December’s gold imports to India at a relatively modest 30 metric tonnes. Compare this to November, when over 100 tonnes were imported, the most in a single month in almost a year. India remains at or near the top of the list of countries with the highest annual gold demand. However, the impact of these various policies on India’s gold-buying habits remains to be seen.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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