The RBI could limit gold imports by banks in "extreme circumstances," it said on Wednesday, as it put forward measures to help the world's biggest consumer of gold rein in purchases and battle a record-high current account deficit.
India, which imported about 750 tonnes of gold last year with 60 percent of that through banks, has already increased the import duty on gold, which now stands at 6 percent.
But a record high current account deficit of 5.4 percent of GDP in the September quarter has raised concern at the central bank, prompting it to link further monetary policy easing to a lower current account deficit (CAD).
"If the CAD remains sustainably high, say in 5.5-6 percent range, for the next three-four quarters, then it might be a case of an extreme situation," a senior official with direct knowledge of the matter told Reuters.
The Reserve Bank of India (RBI) said it would also consider introducing gold-linked financial instruments to divert savings of inflation-wary Indians from gold bars and coins into bonds, it said in a report published on Wednesday.
The recommendations now go to government for review and after its feedback, the RBI should announce new restrictions and products to curb gold import demand in the next few months.
The government has been warned of a credit downgrade by rating agencies due to high fiscal and current account deficits.
Duty rises helped to cut imports by 25 percent last year but analysts were sceptical these measures would have any serious impact on purchases in a country whose obsession with gold means households have more stored away than the U.S. Federal Reserve.
And the central bank itself, describing demand for gold as "excessive," added that it would only be reduced if inflation were benign and there was price and macroeconomic stability.
Headline inflation fell to a three-year low of 7.18 percent in December but still remains above the central bank's comfort level of around 5 percent.
"More restrictions from the government will result in more illegal imports ... unofficial imports have already started in Mumbai," said Kumar Jain, vice president, Mumbai Jewellers Association, which groups 12,000 jewellers.
Other measures could include a special "gold bank" which would buy gold from individuals at much higher rates than those offered by local jewellers in an attempt to move some of the 20,000 tonnes of gold stored by households into the economy.
"Even if these proposals are implemented, the impact on gold import will be limited till the point it is possible to unlock the idle gold stock," said Samiran Chakraborty, regional head of research Standard Chartered Bank, India.
"I think these rules could have a marginal impact on the current account deficit due to the shock-and-awe effect, but not a sustained impact," Chakraborty added.
The central bank itself admits these are only small steps and unlikely to bring down gold imports significantly in India.
"Demand for gold in India is autonomous and may not be amenable for reduction through policy intervention. Several studies have empirically validated that gold can be regarded as a long-run inflation hedge," the RBI said in its report.
Other measures proposed include removing incentives for banks to trade bulk gold with jewellers as banks have been charging them rates below the so-called base rate offered to their best customers, a move which could sharply bring down gold loans. Banks extend gold loans in the form of gold bars to traders at a fixed rate.
The central bank also wants to educate rural customers, who buy some 70 percent of imports, about investing in gold related products, but fell short of details. Some 70 percent of India's population lives in rural areas where access to banks is poor.