RBI imposes restriction on gold imports by banks
May 17th, 2013
The Reserve Bank of India placed
restrictions on banks to import gold
with immediate effect to contain the soaring Current Account Deficit (CAD).
Why this restriction on Gold Imports?
India is among the largest importers of gold in the world. In recent years there has been a sharp rise in the imports of gold notwithstanding the sustained increase in gold prices. Such large import of gold, when the gold prices are ruling high is one major source of bulging trade deficit. The deterioration in Current Account Deficit (CAD) due to large gold imports has implications for financing the same, which would deplete the foreign exchange reserves and could become a drag on the external debt. With scanty domestic production, the gold demands are met entirely through imports. Though it is generally considered that a CAD of 2.5 to 3.0% is sustainable for India, in the more recent years CAD is very high. In 2011-12, external sector resilience has weakened mainly due to higher current account deficit, which in turn was largely on account of worsening trade deficit. Two commodities that led to higher imports were oil and gold. Gold contributed nearly 30% of trade deficit during 2009-10 to 2011-12. It reached a record high of 6.7 % of the GDP in the October-December quarter of 2012 due to soaring oil and gold imports. The large gold imports, thus, have led to major concerns in the macroeconomic management.
Feeling the imperative to address this concern a Working Group on Gold, under the chairmanship of K. U. B. Rao was set up which recommended aligning gold import regulations with rest of the imports for creating a level-playing field between gold imports and other imports. Now, The RBI has decided to restrict the import of gold on consignment basis by banks only to meet the genuine needs of exporters of gold jewellery.
Why this restriction on Gold Imports?
India is among the largest importers of gold in the world. In recent years there has been a sharp rise in the imports of gold notwithstanding the sustained increase in gold prices. Such large import of gold, when the gold prices are ruling high is one major source of bulging trade deficit. The deterioration in Current Account Deficit (CAD) due to large gold imports has implications for financing the same, which would deplete the foreign exchange reserves and could become a drag on the external debt. With scanty domestic production, the gold demands are met entirely through imports. Though it is generally considered that a CAD of 2.5 to 3.0% is sustainable for India, in the more recent years CAD is very high. In 2011-12, external sector resilience has weakened mainly due to higher current account deficit, which in turn was largely on account of worsening trade deficit. Two commodities that led to higher imports were oil and gold. Gold contributed nearly 30% of trade deficit during 2009-10 to 2011-12. It reached a record high of 6.7 % of the GDP in the October-December quarter of 2012 due to soaring oil and gold imports. The large gold imports, thus, have led to major concerns in the macroeconomic management.
Feeling the imperative to address this concern a Working Group on Gold, under the chairmanship of K. U. B. Rao was set up which recommended aligning gold import regulations with rest of the imports for creating a level-playing field between gold imports and other imports. Now, The RBI has decided to restrict the import of gold on consignment basis by banks only to meet the genuine needs of exporters of gold jewellery.
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