No immediate plans to remove gold distortions - RBI

The Reserve Bank of India (RBI) has no immediate plans to remove the distortionary restrictions it has placed on the gold market.

Speaking at a press conference after the announcement of the bank's mid-quarter review, RBI Governor Raghuram Rajan said "Gold restrictions are a a necessary distortion at this point to restore balance to the CAD. Going forward, we would not like this distortion to persist, and we would like to remove it."

But, he said, "When we do (it) in conversation with the government, and what (and) how we unwind these restrictions is something we will have to deliberate over time.''

He went on to add that the RBI measures, the prime driver to narrow the current account deficit (CAD) to 1.8% in the second quarter, would be withdrawn once the deficit stabilises on its own, beyond the imposed gold restrictions.

The RBI chief added that once CAD is stabilised, ``once we see the that the threat of tapering is behind us, we will certainly consider unwinding some of these distortionary actions.

"I would be much happier if we had the kind of CAD we have without significant curbs on anything, including gold. We should aim to have a CAD without any distortions, removing the incentives for smuggling, that is what we will be working for,'' he told members of the press,

The CAD was brought down to 1.2% in the July to September quarter, from 4.9% in Q1. In the first half, CAD stood at $26.9 billion, amounting to 3.1% of GDP, down from $37.9 billion, amounting to 4.5% of GDP in the first half of 2012-13.

"At this point, I feel very comfortable with where we are on CAD,'' Rajan said. The government and the RBI expect to contain CAD at $56 billion this year. Gold imports had accounted for $56.8 billion of the $88 billion CAD in FY2013.

Haresh Soni, Chairman of the All India Gems and Jewellery Trade Federation, which represents over 300,000 jewellers in the country, said that there was a pressing need to relax the curbs as the industry had witnessed a massive spurt in gold smuggling. He added that the industry had lost over 30% business in the last six months.

On an earlier occasion, the Governor too had expressed concern over the spurt in gold smuggling which he elaborated was being paid for through the hawala (illegal) channel.

When India brought back restrictions against legal gold imports, there was a surge of capital and labour devoted to criminal organisations. The sharp decline of official gold imports, from $16.5 billion in the June quarter to $3.5 billion in the September quarter, led to a sharp surge in business for gold smugglers.

Over the past couple of months, hawala premiums, those that are paid to smugglers, have doubled to 2.8%, as unofficial gold imports this calendar year are likely to be at least 50% more than in 2012.

Retailers said around Diwali, premiums had jumped to as much as 3.5%.
The hawala (illegal) market, which trades in currencies and gold unofficially, is also referred to as currency smuggling. The market is used only for financing illegal deals in the country or outside it.

According to officials of investigating agencies, the current size of the hawala market in India is around $20 billion. Over invoicing of imports and under invoicing of exports are the most common practices to finance demand for hawala.

Traders said gold has been in big demand in the hawala market this year and the demand for the same is only rising. However, the illegal market is also becoming competitive. ``With new demand, new channels of supply are coming up and keeping hawala premiums under check is becoming impossible, and these are still at elevated levels,'' said a trader.