Increasing Gold Importers to Reduce Cost Through Competition

Gold has traditionally been the most popular safe haven for investments option for Indians over the years. With increasing per capita income of Indian households, the gold imports have started increasing logarithmically over last few years. The Indians normally buy gold for almost all occasions such as wedding ceremonies, auspicious days, festive sessions, etc and uses gold for investment, gifts, jewellery. However, this love of Indians has become a pain for policymakers in recent years.

Gold being the second largest imported item after crude oil for India, started creating huge capital account deficit (CAD). Hence the government had taken several steps to curb gold imports with the aim of reducing high CAD. The government increased the gold import duty from 2% to 10%. A further reason was the Reserve Bank's 20:80 scheme, which demands that at least 20% imports need to be re-exported.

Interestingly, Gold prices in the international markets came down drastically from USD 1670 per ounce to USD 1350 per ounce, shedding investors' worth by more than 19% in the last couple of years. The international markets are expecting gold prices to drop to further to lower levels. Despite the considerable deterioration in international global prices, the domestic gold prices are only marginally down. Currency depreciation and the government's hike in gold import duty provided the cushion for Indian investors. Today, gold prices have dipped by more than 3% from Rs 30473 per 10 grams two years ago to Rs 29614 per 10 gram.

Though the various curbing steps implemented by the government has controlled the gold imports to some extent in the last one year, the policymakers are still not satisfied with the extent of CAD reduction during this period. Further to help in balancing the country's external balances, RBI has decided to allow more banks to import gold, creating competition which is likely reduce the prices of imported gold. The central bank has allowed Axis Bank, IndusInd Bank, Yes Bank and Kotak Mahindra Bank among the other private players to import the gold.

At present, just six banks and three other financial institutions are allowed to import gold under the 80:20 scheme. However, we are expecting a marginal easing in the cost of gold imports. Also, for the last couple of years, the gold investment started losing its glitter for Indians due to its flattish to negative appreciation during the same period.

Further, the kind of cushion offered during last couple of years, due to various government steps, may not be expected in CY2014. As the economy starts improving, the currency also starts strengthening against the other global currencies (including the USD). Further, the Indian government is expected to roll back some of the harsh measure taken in CY2013 such as the hike in gold import duty. Further, US tapering is also expected tight liquidity positions across the globe and will pull down investment in commodities such as gold. We, at Dalal Street Investment Journal, also anticipate that gold will lose its shine drastically for domestic investors in CY2014. Hence, we advise cutting down on exposure to this glittering asset in CY2014.