The Reserve Bank of India, the nation’s central bank, has granted five private sector banks the right to import gold, in the government’s first attempt to ease severe restrictions on the precious metal, according to sources.
Until now, only six government-controlled banks, and three state-owned trading agencies have been allowed to import gold into India. The five additional banks, which have had import quotas set by the government, will still have to abide by the “80/20 rule”. This rule mandates that 20% of all gold imports must be fashioned into jewelry and exported before the bank is allowed to bring more gold into the country.
It is expected that by increasing the number of importers, gold supply should grow to 40 metric tons a month, from the 20 tonnes imported in February. This should help reduce the domestic premium for gold in India, which reached as high as $160 an ounce over the London spot price in December. The RBI refused to comment on the report, which was based on banking sources speaking anonymously.
Indian Finance Minister P. Chidabaram has resisted calls to reduce the 80/20 restriction, or dial back import duties that have increased from 2% to 10% (and 15% for finished jewelry), saying that any changes will have to wait for the final Current Account Deficit numbers for 2013. The fiscal year ends in May, and those numbers should be available by the first week of June.
The gold restrictions were put into place due to India being the world’s largest importer of gold. This had ballooned the CAD to the point where it was strangling the economy. While the CAD has shrunk noticeably, critics say that the money is still leaving the country, due to the epidemic of gold smuggling. Restrictions on gold imports only make the economy look better, because the outflow on money no longer shows up on the government’s books.
National elections in India begin next month, and will run to May, with a new government being formed in June. The main opposition candidate for prime minister, who is favored to win, is against the present draconian gold restrictions. Therefore, we should expect an increase in gold imports by India in the second half of the year.