RBI defends its stance on investing in gold

Last Updated: Fri, Jan 04, 2013 04:58 hrs

The Reserve Bank of India (RBI) has defended its stance on investing in gold in a scenario where the Current Account Deficit (CAD) has reached a record high. One of the main reasons for high CAD is gold imports.

"The argument that a central bank which had diversified its own assets into gold has no moral right to preach against investment/import of gold is missing an important point. A central bank diversifying its dollar reserves in to gold is entirely different from private agents in a country having capital controls investing in gold, as it has the same effect of allowing such assets to be held in foreign currency," said G Padmanabhan, executive director, RBI in his speech in Thiruvanathapuram on Wednesday.

According to Padmanabhan the central bank undertakes the onerous responsibility of managing the forex reserves of the country with the objectives of safety, liquidity and return in that order, and investment in gold is in pursuit of these objectives. "In the case of private savers, by stashing away the savings in gold, the economy stands to lose the benefit of accumulated savings which can go a long way in adding to the GDP of the country," he said.

Padmanabhan also said given the insatiable lure for gold in the country, it was imperative that gold linked products are introduced which results in the existing gold in bank lockers getting converted as financial products rather than unabated import of gold. This would result in finding a sustainable solution to the current account problems.

India's CAD for the second quarter ended September 2012 rose to $22.3 billion from $18.9 billion in Q2 of a year ago due to higher pace of imports and moderating exports growth. As proportion of the Gross Domestic Product (GDP), the CAD shot up to unsustainable level of 5.4 per cent for Q2 of FY13, from 4.2 per cent for Q2 FY12.

It is more than double that what RBI considers sustainable level (2.5 per cent of GDP) when the economy is growing at a slow pace.

On Wednesday, Finance Minister P Chidambaram said in New Delhi that India's record current account deficit is worrying and hinted at cutting gold imports to bolster weak external accounts.

Speaking about the growth in electronic payments (in volume terms), Padmanabhan said in recent years it was quite heartening when one saw the share of electronic payments as a percentage of total payments grow from 15 per cent in 2003-04 to 48 per cent in 2011-12.

Despite this, in absolute terms, cheque volume continues to be high (52 per cent of total payments), though the growth is showing a declining trend. "While this high cheque volume could be attributed to the overall growth in the economy and the consequent growth in financial transactions, it is nonetheless desirable that transactions in electronic form increases at an increasing rate rather than being contended with transactions through cheques increasing at a decreasing rate," said Padmanabhan.

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