UPDATE 2-India central bank considers more gold import curbs

Wed Feb 6, 2013 1:27pm GMT

* Measures now go to government for discussion
    * Analysts see little impact on imports
    * Bullion bank proposed to move "idle gold"

 (Adds quotes, details)
    By Suvashree Dey Choudhury and Siddesh Mayenkar
    MUMBAI, Feb 6 (Reuters) - India's central bank could limit
gold imports by banks in "extreme circumstances," it said on
Wednesday, as it put forward measures to help the world's
biggest consumer of gold rein in purchases and battle a
record-high current account deficit.
    India, which imported about 750 tonnes of gold last year
with 60 percent of that through banks, has already increased the
import duty on gold, which now stands at 6 percent.
    But a record high current account deficit of 5.4 percent of
GDP in the September quarter has raised concern at the central
bank, prompting it to link further monetary policy easing to a
lower current account deficit (CAD).
    "If the CAD remains sustainably high, say in 5.5-6 percent
range, for the next three-four quarters, then it might be a case
of an extreme situation," a senior official with direct
knowledge of the matter told Reuters.
    The Reserve Bank of India (RBI) said it would also consider
introducing gold-linked financial instruments to divert savings
of inflation-wary Indians from gold bars and coins into bonds,
it said in a report published on Wednesday.
    The recommendations now go to government for review and
after its feedback, the RBI should announce new restrictions and
products to curb gold import demand in the next few months.
    The government has been warned of a credit downgrade by
rating agencies due to high fiscal and current account deficits.
    Duty rises helped to cut imports by 25 percent last year but
analysts were sceptical these measures would have any serious
impact on purchases in a country whose obsession with gold means
households have more stored away than the U.S. Federal Reserve.
    And the central bank itself, describing demand for gold as
"excessive," added that it would only be reduced if inflation
were benign and there was price and macroeconomic stability.
    Headline inflation fell to a three-year low of
7.18 percent in December but still remains above the central
bank's comfort level of around 5 percent.
    "More restrictions from the government will result in more
illegal imports ... unofficial imports have already started in
Mumbai," said Kumar Jain, vice president, Mumbai Jewellers
Association, which groups 12,000 jewellers.
    Other measures could include a special "gold bank" which
would buy gold from individuals at much higher rates than those
offered by local jewellers in an attempt to move some of the
20,000 tonnes of gold stored by households into the economy.
    "Even if these proposals are implemented, the impact on gold
import will be limited till the point it is possible to unlock
the idle gold stock," said Samiran Chakraborty, regional head of
research Standard Chartered Bank, India.
    "I think these rules could have a marginal impact on the
current account deficit due to the shock-and-awe effect, but not
a sustained impact," Chakraborty added.
 
    
    SMALL STEPS
    The central bank itself admits these are only small steps
and unlikely to bring down gold imports significantly in India.
    "Demand for gold in India is autonomous and may not be
amenable for reduction through policy intervention. Several
studies have empirically validated that gold can be regarded as
a long-run inflation hedge," the RBI said in its report.
    Other measures proposed include removing incentives for
banks to trade bulk gold with jewellers as banks have been
charging them rates below the so-called base rate offered to
their best customers, a move which could sharply bring down gold
loans. Banks extend gold loans in the form of gold bars to
traders at a fixed rate.
    The central bank also wants to educate rural customers, who
buy some 70 percent of imports, about investing in gold related
products, but fell short of details. Some 70 percent of India's
population lives in rural areas where access to banks is poor.

 (Additional reporting by Neha Dasgupta; editing by Jo
Winterbottom and James Jukwey)