Exclusive: India might buy gold from citizens to ease rupee crisis

MUMBAI Thu Aug 29, 2013 8:05am EDT

Gold biscuits are seen in this picture illustration taken inside a jewellery showroom in Mumbai June 4, 2013. REUTERS/Danish Siddiqui

Gold biscuits are seen in this picture illustration taken inside a jewellery showroom in Mumbai June 4, 2013.

Credit: Reuters/Danish Siddiqui

MUMBAI (Reuters) - India is considering a radical plan to direct commercial banks to buy gold from ordinary citizens and divert it to precious metal refiners in an attempt to curb imports and take some heat off the plunging currency.

A pilot project will be launched soon, a source familiar with the Reserve Bank of India (RBI) plans told Reuters. India has the world's third-largest current account deficit, which is approaching nearly $90 billion, driven in a large part by appetite for gold imports in the world's biggest consumer of the metal.

With 31,000 tonnes of commercially available gold in the country - worth $1.4 trillion at current prices - diverting even a fraction of that to refiners would sate domestic demand for the metal. India imported 860 tonnes of gold in 2012.

"We will start a pilot project among some banks where we will allow them to buy back gold from individual households," the source, an official familiar with the central bank's gold policymaking, said. "This will start soon, we have discussed (it) with banks."

The RBI will ask the banks to buy back jewelry, bars and coins for rupees. Lenders will have to offer better rates than pawn shops and jewelers to lure sellers.

Any talk of using the country's gold to help meet India's international obligations revives memories of a 1991 balance of payments crisis - when India flew 67 tonnes of gold to Europe as collateral for a loan to avoid a sovereign debt default.

Earlier on Thursday, India's Trade Minister Anand Sharma said the central bank should look into the possibility of monetizing gold holdings.

It was not immediately clear whether Sharma was referring to the 557.7 tonnes of gold the RBI holds in its own reserves, or gold in private hands. He did not give more details of how the proposal would work.

"I have not said there should be any mortgaging of the gold, or auction of the gold, that is incorrect. I have just said the RBI should look into ... how they can benefit the people, particularly with regard to the bonds or the monetization," Sharma said in response to a question in parliament.

Earlier this week in comments reported in the national media, Sharma said "even if 500 tonnes is monetized at today's value it takes care of your CAD", or current account deficit.

Selling gold reserves may sit badly with Indians, many of whom saw the 1991 sale as a public humiliation. The secret operation was only exposed after a vehicle carrying the first consignment of bullion broke down on its way to the airport from the central bank.

"It (pledging gold) will be a desperate measure, and it will send a very wrong signal to the entire country because all the time we've maintained that things are under control even though things are adverse," said Madan Sabnavis, chief economist at CARE Ratings in Mumbai.

Such a sale would also dent international gold prices which took a hit earlier this year after Cyprus said it was considering selling its gold reserves to shore up its finances.

India has taken multiple steps this year to curb imports of gold, its second-biggest import after oil, including raising duty three times to 10 percent.

The rupee, the worst-performing emerging market currency in Asia this year, rebounded from a record low on Thursday after the RBI said it will provide dollars directly to state oil companies to shore up the currency.

In comments published by The Hindu newspaper last week, David Gornall, chairman of the London Bullion Market Association, said India could raise $23 billion by swapping gold for a payable currency for a period of its choice, while remaining the long-term holder of the gold.

Gold forms an essential part of a bride's dowry in India and is considered auspicious as a gift or offering at religious festivals.

(Additional reporting by Siddesh Mayenkar in Mumbai, Rajesh Kumar Singh, Frank Jack Daniel in New Delhi; Writing by A. Ananthalakshmi; Editing by Amran Abocar and Neil Fullick)

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Comments (8)
jrj906202 wrote:
Trading fiat for money(gold).Wonder why anyone would want to do that.Of course,there are Americans doing it,to try to keep up, their standard of living.Always a demand for money.Not so much for fiat,play money.

Aug 29, 2013 11:13am EDT  --  Report as abuse
dareconomics wrote:
Let me get this straight. Indians have realized that their currency is becoming worthless and have been purchasing gold to preserve their wealth. The RBI’s genius plan is to offer to purchase this gold back from the people.

RBI, the problem is that your citizens do not wish to hold your paper anymore. If you want banks to buy gold back from consumers, then don’t offer rupees. Pick another currency instead. Ollie Rehn was just telling us how awesome the economy in the Eurozone will be in 2014, so maybe you could offer Indians euros. Just a thought.

For complete post including charts, images and links:

http://dareconomics.wordpress.com/2013/08/29/around-the-globe-08-29-2013/ ‎

Aug 29, 2013 1:17pm EDT  --  Report as abuse
thunt wrote:
Just to make sure I understand. India is trying to get all the banks to buy gold with a troubled currency, and this will make people want to dump their gold, and drive down the demand for of gold? Also the gov announced it will give “dollars” directly to its gov owned oil companies and this will save india’s rupee?
The people are buying hell out of gold at 10% premium, but they are going to turn around and sell it to banks for a little over pawn shop price? Cause their gov says so?
The writer thinks they might just monetize 500 tons the government owns but not the other 31,000 tons floating in the markets?
So if the gov makes gold money (monetize) , then people will stop wanting it? So like a 1 ounce gold rupee would be worth 1400$ and the people might pay 2500$ in useless gold for it?
Thank god I read this article, I was of the impression that if citizens, banks and government all bought gold, the demand and price would go up. Tomorrow i’m dumping my gold and silver and buying rupees, Cyprus currency and U.S. reserve notes. Because with this many governments using different methods to shore up paper money, soon NOBODY will want to have gold. :S
On the other hand, it is kinda pretty, and I would like to see if there is enouph gold in the world to full my swimming pool. So im gonna keep stacking for now.

Aug 29, 2013 8:32pm EDT  --  Report as abuse
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