Are We Back to Gold Control Act?

RBI announcement on Friday restricting gold imports has been the taking point among the bullion industry. RBI said it would restrict banks to import bullion on a consignment basis only to meet genuine needs of exporters of gold jewellery. This only indicates that we are moving back towards two decade old gold control act and this measure would wipe out the small and medium size jewellers, if implemented as it is pronounced.

While the concerns of the central bankers are understood, RBI should allow more gold backed financial instruments to divert the mad rush towards investment that has been the prime source of demand in the recent years. A report submitted by working committee on “Study of the issues related to gold imports and gold loan NBFCs in India” constituted by RBI & chaired by Deputy Governor Dr. Urjit Patel in January 2013 referred to gold-linked debentures as an instrument to reduce/postpone the demand for physical gold and quoted “…these products gold-linked bonds/debentures provide investors with a combination of exposure to gold price fluctuations, a yield and principal protection......depending on the structure, they can offer capital protection and a varying degree of participation in price fluctuations.”

Clearly, RBI is moving on the right direction for enabling an environment where gold linked debentures and other gold backed instruments shall act as a substitute to the underlying physical demand, there by easing the pressure on the current account deficit arising out of bullion imports. Hence, the focus should be on innovating newer financial instruments on gold rather than targeting the jewellery demand.

Regulation should allow Mutual Funds to invest a portion of their Gold ETF portfolio into gold linked debentures. However, for enabling issuances of such gold linked debentures would require clear guidelines from the regulator. Today, the issuers are unclear on who actually regulates the gold linked debentures - SEBI, RBI or FMC.

Too many cooks spoil the broth. We saw that in the mutual fund industry. Regulation should always be an enabling force and let’s hope that some positive recommendations from the working committee report be implemented.