It’s good to note the brisk speed with which the implementation of the international bullion exchange in the Gujarat International Finance Tec-City is progressing. For it hastens the process of India becoming a price setter in the international bullion market, from being a price taker. The absence of a spot market for gold in the country forced domestic stakeholders to use prices traded on international exchanges to compute local prices. The signing of the memorandum of understanding between the leading stock and commodity exchanges and depository participants last week sets the stage for erecting the market infrastructure on which the bullion exchange will be based. Besides helping discover prices in India, the exchange can also become a future hub of gold trading if international traders are incentivised enough to shift part of their trading here. The necessary regulatory changes have been made by notifying that bullion spot delivery contract and spot depository receipt can be traded on the GIFT IFSC. Bullion vaulting services have also been set up in order to facilitate storage of gold traded at the offshore exchange. Of greater importance is the fact that the International Financial Services Centres Authority has been given the responsibility of supervising the implementation and operations of the exchange according to the IFSCA (Bullion Exchange) Regulations, 2020.
The wrangle over which regulator could supervise a spot gold exchange had stalled the idea until now. The Centre has addressed this by making IFSCA the regulator. Most spot commodity markets feature in the State list; beyond the purview of SEBI. Determining the local price of gold based on the prices traded on the exchange platform imparts transparency that is currently absent. The spot price of gold is currently decided by the Indian bullion and jewellers association, based on buy and sell quotes from ten of its biggest dealers. These dealers convert international gold prices in rupee, add tax and their commission to quote their price. Past experience in other countries such as the UK show that this method of price fixing is vulnerable to manipulation. If the spot exchange takes off at the GIFT IFSC, it can also help jewellers and retailers directly buy gold from foreign traders, instead of using banks as intermediaries. The participant base at the IFSC is also likely to get a boost through a strong bullion exchange in the IFSC.
Attracting foreign companies trading in gold in other offshore centres to the domestic exchange may not be that easy though. The IFSCA needs to provide enough incentives by way of lower transaction cost and other benefits to make them shift to the GIFT IFSC. Also, it is not clear if retail clients will be able to sell their gold at the exchange. If domestic retail participation has to be facilitated, it would need gold assaying centres to be set up at the IFSC and regulatory changes may also be required.