The time is opportune to revisit India’s gold policy in the backdrop of global central banks’ enhanced gold purchases, which is a serious sign of de-dollarization, several fintech startups entering the gold segment in recent years, and banks launching their own gold loan products, among others, according to a State Bank of India report.
SBI’s economic research department (ERD) said that given the precarious situation wherein both stocks and gold are on fire while bond yields are retreating, the aftermath of monetary policy, when Central Banks are emerging as largest purchasers of bullion, suggests impeding de-dollarization by economies en masse.
In this backdrop, the ERD suggested that India could resort to better recycling of gold and move towards an industry-specific Self Regulatory Organization (SRO) for this highly lucrative asset class that can help streamline higher imports while also positioning India as a “Jeweller to the World”, by leveraging the strong Indian diaspora abroad.
De-dollarization entails a significant reduction in the use of dollars in world trade and financial transactions, decreasing national, institutional and corporate demand for the greenback, JP Morgan said in an August 2023 report. This would diminish the dominance of the dollar-denominated global capital market, in which borrowers and lenders around the world transact in dollars.
The last major intervention in gold policy was in 2015 when the Government of India launched the Revamped Gold deposit scheme. However, it saw little retail participation, per ERD.
“Even the continuous issues of Sovereign Gold Bonds since 2015 have not met the desired success (total mop up at 122 ton a fraction of our annual imports) despite delivering stellar returns to investors since first tranche of 2015 redeemed (~150 per cent return with interest credit),” Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI said.
The ERD noted that the price of gold has reached all-time high, hovering comfortably above $2000 per troy ounce, with forecast of its steep rise in years to continue as the asset class enjoys tailwinds from a mélange of factors.
Central Banks, in 2022, increased their purchases of gold by 152 per cent to over 1,136 tonnes. In 2023, central banks bought a net 800 tonnes of gold this year.
“Geopolitical factors, de-dollarization, inflation hedging has increased its demand and hence price,” Ghosh said.
Revisit gold policy
The ERD emphasised that gold recycling needs focussed attention. In India, recycled gold comprises about 11 per cent of the supply.
“Gold sold for cash is usually linked to consumer sentiment and the economic backdrop. However, over the years, the share of gold sold for cash has remained broadly steady despite the economic slowdown of 2012-2014 and the pandemic.
“This is due to the vibrant gold loan industry in India, which makes it straightforward to borrow funds against gold rather than selling it,” Ghosh said.
As per ERD estimates, old jewellery scrap represents the largest source of recycling in India, with an approximate 85 per cent share of the total. The other key component is old bars and coins that people either sell or exchange for jewellery.
“ESG (Environmental, Social, and Governance) concerns, from sourcing to making of jewellery is gaining a foothold in mainstream as niche groups of influential buyers are increasingly focussing on ESG commitments of ecosystem, impacting consumer cost and financing factors in days ahead,” the report said.
SRO for gold industry
Referring to the fragmented nature of the industry, buyers’ preferences changing constantly and evolving regulatory requirements,
the ERD recommended setting up a Self-Regulatory Organisation (SRO).
The report noted that the industry is largely unorganised and with considerable gaps across the value chain, besieged with market infrastructure as well as financial constraints, especially for the small and medium players in the ecosystem even though the industry has a footprint throughout the vast latitude of the country.
The ERD emphasised that SRO, the ‘First level of Defence’ that builds trust and credibility, is the need of the hour as it will harness market opportunities to serve consumers/customers across geographies.
Jeweller to the world
Jeweller to the world
Given the proven craftsmanship, rich cultural heritage’s imprint on the design philosophy and the impeccable brand equity India has been able to accrue of late, positioning India as the “jeweller to the world” is quite possible if the industry can connect the dots and move forward in unison through leveraging the strong Indian diaspora abroad, the report said.
The ERD emphasised that as the second largest gold-jewellery market globally and the fastest-growing large economy, fostering an unmatched financialisation and formalisation drive for a billion-plus populace can truly benefit from gold-centric measures for both consumers as also financial stakeholders.