Curbing bank funds will spike prices, help grey markets: GJF

Last Updated: Sun, May 05, 2013 09:06 hrs

The Reserve Bank's decision to restrict bank finance to gold imports meant only for jewellery exports will jeopardise the supply system and increase prices apart from boosting grey market, an industry body has said.

"The RBI's restriction on the import of gold on consignment basis by banks only to meet the genuine needs of exporters of gold jewellery, will have repercussions on the industry.

"The premium on the products will rise, the volatility will rise, there will be disparity in the market, disturbance in the supply chain and flourishing of the grey market," All India Gems and Jewellery Federation (GJF) Chairman Haresh Soni said in a release.

Instead, the government should take steps like banning imports of coins, unlock public coins in market, limit or ban sale of coins by banks, encourage local coin manufacturers, he added.

He further said the government should introduce measures to identify gold used for investment purpose and for retail consumption.

"The non productive gold lying with exchange traded funds (ETF) should be channelised through nominated agencies in the domestic market, so that the import of the precious metal can be reduced," he added.

RBI last week further tightened the screws on both bank and non-banking finance companies into gold funding and restricted banks financing gold import only to gold jewellery exporters.

The apex bank, while announcing the annual monetary policy, also restricted the lending against gold coins up to 50 grams only.

GJF former chairman Bachhraj Bamalwa opined that RBI's step will completely jeopardise the supply system of gold to the manufacturers.

"Gold will not be readily available and cost will increase. If banks are not able to supply gold, smuggled gold will flood the market," he said.

"A recommendation to restrict the import of gold will also allow the parallel economy to flourish allowing grey market dealers to actively participate causing a huge current account deficit (CAD) situation again. We request the government and RBI to take the industry into confidence before taking such drastic steps," he said.

Echoing a similar view, GJF Director Ashok Minawala said the industry does not believe that this move is to ease the issue of the CAD. However, curtailing the import of gold on consignment basis will jeopardise the gold industry on the whole as they will not continue to receive loans in the form of gold from banks as prevalent in the industry.

"This move will definitely have a negative impact on the procurement of gold for manufacturing and distribution and the consumer will eventually face shortages that will trigger a new dimension of price disparity," he said.

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