India should allow banks to hold gold as reserves

MUMBAI/SINGAPORE: India should allow banks to use gold as part of their liquidity reserves, which would let them make more use of gold inside the country and reduce the need for imports, an industry body said on Tuesday, seeing that as an alternative to import curbs.

The world's second-biggest consumer of the metal should also consider setting up an exchange for transparent gold pricing and to streamline trade, according to a report commissioned by the World Gold Council (WGC).

"We have made our points to the government and some of these recommendations are in consideration," Somasundaram PR, head of the WGC's India operations, told Reuters. He did not elaborate.

Last year, struggling with a high trade deficit, India imposed a record 10 percent import duty on gold and a rule requiring a fifth of all imports to be re-exported. Bullion is the second-biggest item on India's import bill after oil.

The WGC says allowing banks to hold gold as part of their liquidity reserves would motivate them to introduce gold deposit schemes, which would in turn circulate existing bullion within the country, removing some of the need to import fresh supply.

"The solution to meeting India's enduring appetite for gold lies not in restricting the import of gold, but in making better use of the gold that is already in the country, making it a productive, fungible asset class like any other financial savings," Somasundaram said in a separate statement.

About 22,000 tonnes of gold is estimated to be held in Indian households.

Gold deposit schemes are already offered by banks but have not proved popular with consumers, who prefer to hold their gold in ornament form and would need strong incentives to give up heirlooms and wedding gifts.

Once the consumer deposits gold with the bank, it is refined to be sold to others. The consumer earns interest and receives gold bars when the term matures, regardless of what was originally deposited.

"At present, financial products linked to gold have been poorly marketed. If banks were able to include gold in their reserve calculations, they would be financially incentivised to innovate, market and explain gold-based products," the WGC report said.

The re-export rule was scrapped late last month to counter the smuggling and high premiums that had resulted. Although the rules had curbed gold supplies entering India, consumer demand remained strong.