India gold monetisation move to be launched ahead of Diwali

Mumbai // A soon-to-be-introduced gold monetisation programme in India will have far-reaching effects, including curbing smuggling and reducing global prices of the precious metal, according to analysts.

India’s prime minister Narendra Modi on Sunday said a programme to let Indians deposit gold in banks and earn interest on it will be launched before Dhanteras, which falls on November 9. This is the first day of the Diwali festival, when Indians traditionally buy gold. India is also planning to launch a sovereign gold bonds programme to reduce the amount of physical gold held by Indians.

Much of the supply of precious metal in the country is kept in homes and is unproductive in terms of its role in the economy, with Mr Modi describing it as “dead money”. These steps are part of the government’s efforts to bring gold into the formal financial system and reduce imports, which weigh on India’s current-account deficit.

India is the world’s largest consumer of gold, buying 842.7 tonnes last year, according to the World Gold Council.

“It is expected that gold monetisation will not only bring India’s import bill down, but will also cause the price of gold to decrease globally, besides reducing the smuggling of gold into the country,” said the India Gold Policy Centre, part of the Indian Institute of Management Ahmedabad.

Gold plays a significant cultural and traditional role in India, including in weddings and religious festivals, and many Indians use it as an alternative to the formal banking system to store their wealth.

About 22,000 tonnes of gold, worth more than US$1 trillion, is kept in homes in India, a report by the World Gold Council and the Federation of Indian Chambers of Commerce and Industry estimated.

Many Indians in rural areas do not have access to a bank account at all, so gold is an easy way for them to invest their funds.

“Gold can be part of the economic strength of the country,” said Saurabh Garg, the joint secretary of investment for India’s department of economic affairs. “That is the intent of the gold programmes – to ensure that the benefit goes both to the economy and to the individual.”

Mr Garg said that under the gold monetisation programme, Indians would be able to deposit a minimum amount of 30 grams of gold and added that the interest rates would be revealed in due course. That deposited gold could then be lent out to jewellers, auctioned or used at the Reserve Bank of India.

“With the gold bond programme what we have said is we would give the same returns as gold bullion would give through the purchase of a gold bond, and some interest in addition will be given,” said Mr Garg.

Nayan Jani, the editor of Jewellery News India, a trade publication, said the success of the programme would depend on the “transparency” of the initiative, the interest rates and how much “trust Indians were willing to put in the government”.

He added that he thought the programme would initially only make up a small percentage of Indians’ investment in gold and would be unlikely to negatively effect purchases of gold jewellery.

The import duty on gold into India was raised to a record high of 10 per cent in 2013 to try to stem imports of the precious metal.

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