New RBI gold import 'curb' could backfire, add to CAD woes

Moneycontrol Bureau

The Reserve Bank of India’s latest 'restriction' on gold import is being viewed as a reversal of the much harsher earlier curbs on the import of the yellow metal.

On Monday, the RBI said that gold importers, including banks, would have to ensure that at least 20 percent of the yellow metal they import is used for exports. Early last month, the central bank had ruled that any import of gold would be permitted only on consignment basis to meet the genuine needs of exporters of gold jewellery. Not just that; the jewellery firms would have to put up 100 percent cash margin for buying gold. The move aimed at stifling speculation in gold, also increased working capital costs for jewellery firms and squeezed their operating margins.

"Compared to banning the consignment route (which has now been reversed) the measures are likely to be negative for the Current Account Deficit as they reduce funding challenges for domestic jewelers. This makes the arithmetic a bit tricky and actual imports will depend on checks and balances on reporting of gold exports," says brokerage house Kotak Securities in its report.

Also read: Gold bears gaining upperhand, Rs 23,000/10 gm on cards

According to Kotak chief economist Indranil Pan and team, the new rules allow nominated banks/agencies to make available gold in any form for domestic use only to entities engaged in the jewellery business/bullion dealers supplying gold to jewelers.  

"The efficacy of the new measures in restricting gold imports to reasonable limits can however be blunted if the jewellery export business suddenly bunched-up demand. In such conditions, the available limits for banks to import gold would naturally go up, leading to more than necessary amounts being imported," says the Kotak report.