Adding allure

The move to flag off a gold monetisation scheme, announced in the Budget, must be commended as much for its timing as for its ability to bring about long-term savings in the country’s import bill. Had such a scheme been initiated in 2013, when the country hovered on the brink of a foreign exchange crisis, it was likely to have garnered a lukewarm response. At the time, inflation was soaring and equities were in the doldrums, while gold had delivered double-digit returns for five consecutive years. But the situation has changed dramatically since then. Consumer price inflation is now down to 5.1 per cent. Gold, in rupee terms, has lost 6 per cent annually in the last two years and savers who chose it over equities or debt funds have reason to rue their decision.

However, Indian households have a natural affinity for bullion and getting them to part with even a fraction of the 20,000 tonnes that they are estimated to own, will not be easy. If the new gold monetisation scheme should meet with greater success than earlier efforts, its features need to be made less restrictive. A key reason for the poor response to bank-operated gold deposit schemes was that they set an unrealistically high bar on minimum deposits. SBI’s gold deposit scheme, for instance, accepts a minimum of 500 grams, a quantity most retail households are unlikely to possess. The requirement that the gold deposited be melted and assayed before the bank decides to accept is also a deal-breaker. The interest rate these deposits offer, at 0.75 to 1 per cent on the prevailing value of gold, isn’t particularly alluring either. Reworking the gold deposit scheme by doing away with the minimum deposit requirement and evolving standardised charges for wastage addresses the first two problems. But interest rates on gold deposits need to be bumped up too; this can be managed by allowing banks to on-lend the gold they receive to the jewellery industry at market interest rates. Given the restrictions on bullion imports, domestic jewellers often end up sourcing raw material at stiff premiums to international prices. The Metal Gold Loan scheme for banks could be reworked by the RBI to facilitate this.

Banks have been reluctant to accept retail bullion deposits because they are wary of exposing their balance sheet to the risks of fluctuating gold prices and exchange rates. So far, in acting as canalising agencies for bullion imports, they passed on such risks either to suppliers or end-users. But the success of retail gold deposits will hinge on allowing savers to redeem their deposits in physical gold. This will require banks to take on gold price risks. Before flagging off the gold monetisation scheme, the Centre would be wise to ensure that banks acquire the expertise to actively hedge their bullion and forex exposures in global financial markets.

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