RBI curbs on gold counter-productive

Krishnamurthy Grandhy | Updated on March 12, 2018 Published on May 20, 2013

The central bank's move to curb gold imports on a consignment basis will only lead to higher forex outgo on each transaction.

The Reserve Bank, in its May 13 notification, restricts with immediate effect, the import of gold on consignment basis by banks. This will now be allowed only to meet the genuine needs of exporters of gold jewellery.

It is aimed at reducing the demand for gold for domestic use. How will the restrictive measure impact various players?

So far, a substantial portion of gold imports has been taking place on a consignment basis. Under this arrangement, even on import of gold into India, the ownership of gold continues to rest with the overseas supplier.

The supplier of the metal happens to be the ‘consignor’ and the nominated banks are the ‘consignee’.

As and when the sale of metal under consignment takes place, the remittances will be made by the latter to the former in accordance with the dispatches.

Under the arrangement, if the gold is sold on ‘metal loan’ basis, the nominated banks do have back-to-back line of credit on similar terms from the overseas supplier.

On sale of the metal, the ownership passes to the domestic customer. In the case of a sale on a loan basis to an eligible customer, such a customer becomes a debtor to the nominated bank and the latter, in turn, would be a debtor to the overseas supplier.

Under the arrangement of consignment-based imports, the overseas supplier ships the metal into India in lots and the same is kept in safe vaults pending delivery to domestic customers on sale. No advance payment nor down payment nor any interest payments are made to the overseas supplier.

A restriction on this arrangement of importing gold on consignment basis would make India cough up more forex.


Reserve Bank guidelines permit import of gold on a loan basis. As per the existing rules, the nominated banks can import gold bullion from an overseas supplier on a metal loan basis.

Such a loan is denominated in terms of quantity of gold. The loan tenor shall not be more than 180 days from the date of shipment. The interest shall be at the prevailing international rates.

With this arrangement, the importer-nominated banks have to bear the interest cost from the date of shipment abroad up to the time of sale realisation -- which is not the case with regard to consignment imports.

The foreign exchange outgo is additional to that extent. The added cost will have to be ultimately be borne by the domestic end-users.

In the case of metal import on D/P (documents against payment) basis, the import cost of the metal has to be paid prior to its sale. The foreign exchange outgo is advanced, which is again to the disadvantage of India.

With the change in the regulations restricting the consignment gold imports, the precious yellow metal, being raw material for ornamental jewellery, is to be held in stock by domestic users. Thus, valued foreign exchange is stocked by Indian customers rather than by foreign suppliers as consignors.

The restrictive measure is to the advantage of overseas suppliers as the restriction is not on import quantity but on a particular type of import arrangement. The RBI move was a response to a gold import surge.

The exceptionally huge quantity of gold imports in April 2013 was due to heavy fall in gold price. The event-related gold consumption and consequent imports cannot be mistaken as a parameter for forthcoming trends.


The month of May 2013 will witness the readjustment of trade modalities due to sudden disbanding of consignment imports for domestic use. In the process, the gold imports would temporarily get deferred.

The consequent reduction in gold imports in the current month cannot be mistaken as a result of change in import regulation.

The large number of small and medium retail jewellery manufacturers and traders will bear the brunt.

At present, they deposit their daily sales realisations with intermediary traders or nominated banks to purchase and take delivery of metal with ease. But now they would have to lock up funds to maintain the necessary stock level.

They will not be able to raise the funds easily. The small players will practically get marginalised in the already highly competitive trade.

Gold bullion/jewellery are purchased mainly for three characteristic reasons: consumption, investment and speculation.

Personal consumption is the offshoot of sociology emanating from culture, customs, habits and perceptions. Only reformists and time may be able to change the social mindset.

Physical purchases for investment purposes can be modified by fiscal measures and aggressive promotion of gold-backed and metal price sensitive bonds, funds and such other instruments. Speculation in gold can be curtailed.


As a result of restriction on gold imports on consignment basis for domestic use, there is chaos. The overseas suppliers refer the matter to their legal departments and defer the shipments.

The nominated banks worry over the sudden cancellation of orders/indents, locking up of their own funds, likelihood of crossing open position limits and additional requirement of capital adequacy.

The manufacturers and traders are left high and dry. The Indian customers at large have to pay premium for all of it. The RBI circular instruction is applicable to only scheduled commercial banks who are authorised dealers in foreign exchange.

The non-banking approved PSU agencies and private sector nominated agencies are not covered by the latest regulations. As a fallout, non-official channels should not gain strength.

(The author is a chartered accountant.)

Published on May 20, 2013
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