In a move that should cut premiums on gold, lower prices for buyers and cut smuggling, the government unexpectedly scrapped a rule imposed in August last year mandating that a fifth of all the precious metal imported should be re-exported. The Reserve Bank of India issued a notification withdrawing the norm imposed on August 14, 2013, to reduce the yawning current account deficit and relieve pressure on the rupee that had weakened sharply. At the time, emerging markets had come under pressure because of talk about the US Federal Reserve winding down its stimulus programme.“It has been decided by the government of India to withdraw the 20:80 scheme and restrictions placed on import of gold,“ the Reserve Bank said.
The rule, along with the high customs duty of 10% -raised in stages to that level last year -had led to a rise in smuggling, besides distorting imports. The government said the current account deficit is no longer a concern so there is no reason to keep the curb in place. Why continue with the emergency measure when the current account deficit is under control?“ said a government official, adding that it had become counter-productive, leading to distortions and illicit imports.
The current account deficit narrowed to 1.7% of GDP in FY 14 from 4.7% of GDP in the year before and is likely to stay at this level in the current fiscal year as well. The government was also concerned that the rule was encouraging importers to hoard gold, causing a distortion in trade.
Friday's decision to scrap the restriction took the bullion markets by surprise as they were anticipating a tightening of rules following a surge in gold imports in October to around 114-115 tonnes from less than 25 tonnes a year. Speculation had been rife over the past few weeks about such a move.
However, there is expectation in some quarters that the government may impose suitably non-distorting curbs if imports remain high.
Premiums on gold are collected by nominated agencies and other authorised importers such as star and premium trading houses that import the yellow metal on a consignment basis for supply in local markets.When supply is tight, premiums rise, and vice-versa. Bullion dealers in Mumbai said premiums had collapsed from $8-10 an ounce to virtually zero after news of the government decision was aired on the electronic media.
Last year, India imported 825 tonnes of gold. In the January-September period, gold imports stood at 525 tonnes.
The rule, along with the high customs duty of 10% -raised in stages to that level last year -had led to a rise in smuggling, besides distorting imports. The government said the current account deficit is no longer a concern so there is no reason to keep the curb in place. Why continue with the emergency measure when the current account deficit is under control?“ said a government official, adding that it had become counter-productive, leading to distortions and illicit imports.
The current account deficit narrowed to 1.7% of GDP in FY 14 from 4.7% of GDP in the year before and is likely to stay at this level in the current fiscal year as well. The government was also concerned that the rule was encouraging importers to hoard gold, causing a distortion in trade.
Friday's decision to scrap the restriction took the bullion markets by surprise as they were anticipating a tightening of rules following a surge in gold imports in October to around 114-115 tonnes from less than 25 tonnes a year. Speculation had been rife over the past few weeks about such a move.
However, there is expectation in some quarters that the government may impose suitably non-distorting curbs if imports remain high.
Premiums on gold are collected by nominated agencies and other authorised importers such as star and premium trading houses that import the yellow metal on a consignment basis for supply in local markets.When supply is tight, premiums rise, and vice-versa. Bullion dealers in Mumbai said premiums had collapsed from $8-10 an ounce to virtually zero after news of the government decision was aired on the electronic media.
Last year, India imported 825 tonnes of gold. In the January-September period, gold imports stood at 525 tonnes.
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