Finance Minister P Chidambaram warned that the government may be left with no option but to make gold costlier, unless consumption of the yellow metal declined.
He said the government was considering steps to curb high gold imports, one of the key reasons for the widening current account deficit (CAD). An easy way of doing that would be to hike import duty of gold, which would push up the domestic price of gold. Last year in January, the government had sharply hiked import duty on gold, which curbed demand temporarily.
For the July-September quarter of this fiscal, CAD climbed to a record high of 5.4 percent of the GDP.
Terming the latest CAD as 'worrying', Chidambaram said gold imports were a huge drain on the current account, and appealed to the public to reduce import of gold. There is enough gold in the country, he said.
Chidambaram said the government had financed the July-September CAD partly through its own reserves.
The government's task of bridging the deficit was made somewhat easier by strong foreign capital flows into equities and debt in 2012. But if the CAD stays high, the rupee could weaken at some point. This could then prompt a partial pull out by foreign investors to minimize the erosion in their portfolio value because of a weak rupee.
"Despite surging portfolio inflows in 4Q12, the Rupee actually depreciated from its levels at the start of the quarter and was running to stay in the same place from then on,” said a note by brokerage house JP Morgan.
"In December for example, despite USD 5 billion of inflows, the currency was flat and did not outperform emerging markets (EMs), even as many other EMs witnessed a sharp appreciation on the back of easy liquidity – reinforcing the extent to which an elevated CAD is serving as a headwind for the INR(Indian rupee),” the note said.