India’s gold imports will reach a “substantial” two per cent of gross GDP in the next few years, and there is a need to offer alternative instruments with “gold-like qualities,” Subir Gokarn, Deputy Governor, Reserve Bank of India, said.

“People are buying gold despite the high price. This in some ways challenges the supply-demand dynamics,” he said at the Indian Banks’ Association’s annual Bankers Conference here.

Gold imports grew 39 per cent in financial year 2012 and accounted for almost three-fourths of current account deficit (CAD). India’s current account deficit was 4.2 per cent of GDP, or $80 billion, in FY 2012.

According to Gokarn, “India imports about one-fourth of the total global supply of a little over 4,000 tonnes, and this excess gold demand is creating stress on the system, particularly on the balance of payments.”

The reasons for the huge imports are: Indians’ affinity for gold; the perception that the yellow metal provides a hedge against inflation; and the relatively high returns — in the last three years, investment in gold has given a whopping 70 per cent return.

“People cannot be denied an opportunity to invest in gold. Gold returns have been higher than those of the Nifty, one-year bank deposits and 10-year-government bonds over the last few years,” he said.

The challenge, he stressed, is to find products which can give people gold-like qualities and, thereby, reduce the physical possession of the metal.

The Reserve Bank of India will bring out a draft paper shortly to propose alternatives such as gold-linked account, gold-accumulation plan, modified gold-deposit scheme, and gold-pension scheme.

The public can offer their comments and suggestions on the draft paper.

(This article was published on November 25, 2012)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.