Provide investment options to curb gold imports: RBI panel

Last Updated: Thu, Feb 07, 2013 05:20 hrs

Mumbai, Feb 6 (IANS) The Reserve Bank of India (RBI) Wednesday called for reducing India's current account deficit (CAD) and said the government must take steps to curb gold imports and design innovative financial instruments to ensure real returns.

It said high gold import bills are a "strain" on India's external sector stability.

"Large and sustained gold imports are a strain on the external sector's stability. Given the precarious global economic situation and its impact on the Indian exports, there is a clear need to reduce the current account deficit (CAD) considerably," a RBI working group on issues related to gold imports said in its report released Wednesday.

India's current account deficit widened to a record high of 5.4 percent of the Gross Domestic Product (GDP) during July-September quarter of 2012-13, largely due to widening trade deficit.

Gold is the second highest contributor to India's import bill after petroleum product. In the first three quarters of the current financial year, India imported gold worth nearly $38 billion. Total value of gold import in 2011-12 was $56.5 billion.

The panel headed by K.U.B. Rao, advisor, department of economy and policy research at the RBI, suggested that the government should introduce innovative financial instruments with real returns matching on investment in gold.

"The real attraction for gold is clear and simple. High returns, high liquidity and no tax and documentation related hassles makes gold a sought after investment option," the panel said.

"If interest earned on various financial savings instruments is attractive and positive with an effective return matching returns on investment in gold, a part of the demand for gold will be automatically diverted to the financial instruments," it said.

"Demand for gold will come down commensurately with the availability of alternative instruments for investment with real rates of return," it added.

Last month, the government hiked import duty on gold to six percent from four percent in a bid to discourage import.

The panel recommended that the import duties on gold should be reviewed from time to time to dissuade gold imports as warranted by evolving balance of payment situation.

"While sharp increase in import duties is counterproductive, a well modulated increase in import duty may reduce the demand. The Group feels that under the current serious position of an all time high CAD, we need to use a combination of demand reduction measures, better domestic supply management and monetisation of idle gold stocks to moderate the demand," it said.

The panel also emphasised on the need for putting more restrictions on carrying gold and gold jewellery by incoming Indian community from abroad.

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