RBI deputy governor Subir Gokarn has a point when he says the only way to save the widening current account deficit—and hence the rupee—is to get Indians de-addicted from gold. In FY12, India imported over $50 billion of gold, implying that this made up around 70% of that year’s current account deficit. Getting Indians off gold, however, is easier said than done since a large part of the increased demand is related to uncertain global and local economic conditions as well as to act as a hedge against inflation that is proving difficult to control. To that extent, gold demand will dampen as the economy starts picking up, as investment opportunities open up and as inflation starts to slow to reasonable levels. But there’s a bit of chicken and egg here: till gold demand remains strong, the rupee will remain weak, and that pushes up inflation which then causes another rush for gold.
This is where Gokarn’s suggestion—RBI will soon put out a paper on this—comes in. Today, if someone wants to buy gold as a hedge, this increases imports and hence the current account deficit. If, however, consumers get the features of gold without the physical import, things will be quite different. The way this could work is as follows: Person A goes to a bank with R32,530 and gets a piece of paper saying she is entitled to 10 grams of gold. The bank then books a contract in the futures market in, say, Singapore, and pays necessary charges to keep the contract alive. After two months, or whatever period, if the price of gold rises 20% and Person A wants her gold, the bank will square the overseas contract and buy gold to give to Person A. Since this gold will now have to be imported, the only way the scheme satisfies consumer need for gold while not hitting the current account is if, say 1 in 10 people, want their gold in physical form. Based on the purchases of gold ETFs, which are backed by physical stocks of gold with mutual funds, the preference seems to be the other way around—9 in 10 persons want their gold in physical form and just 1 buys it in demat or ETF form. But given that around 40% of those who buy physical gold do so in bars and coins, it is obvious consumption demand is not driving gold imports. There is then considerable scope to sell gold-linked deposits based on global futures contracts. A lot will, however, depend on the cost of servicing the futures contracts and the value of the rupee. It is, on balance, an effort that’s definitely worth making.