Government mulls financial products to dampen gold demand
Please read the report "Government mulls financial products to dampen gold demand" in ET and my comments:
Economic Times, September 17, 2012
17 Sep, 2012, 05.00AM IST, The writer has posted comments on this article Shaji Vikaraman & Hema Ramakrishnan,ET Bureau
Government mulls financial products to dampen gold demand
The government and financial sector regulators-the Reserve Bank of India and the Securities and Exchange Board of India -are in discussions to launch financial products intended to discourage demand for gold in its physical form.
MUMBAI/NEW DELHI: The government and financial sector regulators-the Reserve Bank of IndiaBSE 3.74 % and the Securities and Exchange Board of India -are in discussions to launch financial products intended to discourage demand for gold in its physical form and excessive speculation in real estate.
Data released by RBI last month showed that financial savings of Indian households, as a proportion of GDP or national income, fell to 7.8% in 2011-12 from 12.2% in 2009-10 because of a decline in small savings and slower growth in households' holdings of bank deposits, currency and life funds. Instead, households favoured investing in gold, which is considered to be a safe haven and an effective hedge against inflation.
A senior finance ministry official said that the government is considering the feasibility of introducing instruments linked to gold, though a final decision is yet to be taken.
In the past, the government had launched gold bond schemes including offering amnesty to those with unaccounted funds to prompt them to channelise money for productive uses rather than hoarding the physical asset. But these schemes had had little impact.
India imports a huge quantity of gold which has an impact on the current account deficit (CAD)-the excess of imports of goods and services over exports. A rising CAD puts pressure on the rupee. India's CAD was 4.1% of GDP for the year ended 31 March 2012, well above the comfort level of policy-markers. India imported gold worth $60 billion in FY12 compared to $40 billion a year ago, one of the reasons for widening of the current account deficit.
The other financial product which policy makers want to work on is one linked to real estate and generates reasonable returns in order to curb speculative activity. That may be a tough task considering that four years after Sebi unveiled rules for real estate mutual funds, not a single scheme has been launched.
Fund houses and regulatory officials say that difficulties in calculating Net Asset Value or NAV for schemes linked to realty and the absence of real estate regulator have dampened interest. In the case of gold, there are already products such as gold exchange-traded funds that track the price of physical gold. These are easy to buy, tradeable and more tax efficient.
The Chairman of the Prime Minister's Economic Advisory Council C Rangarajan has said that an attractive product linked to the price of gold could help put brakes on a growing number of people buying gold as a hedge against inflation.
There are products overseas including gold derivatives, but they are highly unlikely to be considered in the local markets. According to Dhirendra Kumar of Value Research, which tracks mutual funds, the best way to discourage excessive consumption of gold is to get the economy back on track. "The safest way to deal with such a situation is to ensure that the economy is on track as stocks and bonds will do well rather than issuing gold bonds," he said.
Readers' opinions (5)
MVK (HYDERABAD)
17 Sep, 2012 10:02 AM
GOI should create New PSU to Produce GOLD in India and abroad to meet ever increasing gold demand. Banks should reduce gold loans.Raise Import Duty on Gold .Gold is selling Globally at DOUBLE the Cost of Production.
Agree (0)Disagree (0)Recommend (0)Offensive
gopalkiran.123 (mumbai)
17 Sep, 2012 09:01 AM
can someone tell the figure how much in percent term was added to our economy by amnesty scheme and gold bond scheme as I believe Govt must launch gold bond scheme along with amnesty scheme as this will reduce the role of paralel economy increasing the percentage of funds regularised and put to productive use.This will further reduce the black money in gold and construction sector thus reducing our current account deficit and saving in foreign exchange as lower gold will be imported.Treating people with sugar instead of bitter pills will be in the interest of people as well as government.
Agree (0)Disagree (0)Recommend (0)Offensive
M G WARRIER (MUMBAI)
17 Sep, 2012 09:01 AM
This is an initiative in the right direction. Market and analysts will always resist or try to discourage such moves, as the ‘margins’ come down as transparency and availability of user-friendly financial instruments increase. Perhaps RBI and GOI could consider introducing new and innovative instruments in mutual fund and prepaid payment instruments segments. If half the effort GOI is taking to market a still-born product like New Pension Scheme even before a supporting legislation is in place to promote gold-backed financial instruments on the lines suggested by Dr Rangarajan or even Gold-backed Debit Cards(GDC), the investor perception will change. If a depositor agrees to maintain an average balance of a pre-decided amount, his account should be credited with gold of equivalent value and issued a GDC which he can use to withdraw cash, make payments and buy things like any other debit card, but his balances in the account will vary with the price of gold any day. This is just an example. Similar instruments against commodities and services could be thought of. Real estate related financial instruments can turn out to be highly speculative and providing safety of invested funds can be a tough task.
Agree (0)Disagree (1)Recommend (0)Offensive
kishor (india)
17 Sep, 2012 08:03 AM
loan facility on GOLD by banks and other financial institutions should be limited to Rs.50000/- per person which should be strictly by AADHAR number,linkage of all banks for gold loans and only once. HOPE demand for pysical gold be reduced.Interest rates on deposits should be increased.
Agree (0)Disagree (2)Recommend (0)Offensive
Ulysses (USA)
17 Sep, 2012 05:54 AM
Since 1970 the Indian rupee has lost 99.5% of its purchasing power while gold has gained 300%. In other words, "saving" in fiat currency has been a recipe for disaster. Is it any wonder that the public prefers to put its savings in gold? If the public is expected to save, then they must be given something worth saving.
Agree (9)Disagree (0)Recommend (1)Offensive
M G WARRIER (MUMBAI)
17 Sep, 2012 09:01 AM
This is an initiative in the right direction. Market and analysts will always resist or try to discourage such moves, as the ‘margins’ come down as transparency and availability of user-friendly financial instruments increase. Perhaps RBI and GOI could consider introducing new and innovative instruments in mutual fund and prepaid payment instruments segments. If half the effort GOI is taking to market a still-born product like New Pension Scheme even before a supporting legislation is in place to promote gold-backed financial instruments on the lines suggested by Dr Rangarajan or even Gold-backed Debit Cards(GDC), the investor perception will change. If a depositor agrees to maintain an average balance of a pre-decided amount, his account should be credited with gold of equivalent value and issued a GDC which he can use to withdraw cash, make payments and buy things like any other debit card, but his balances in the account will vary with the price of gold any day. This is just an example. Similar instruments against commodities and services could be thought of. Real estate related financial instruments can turn out to be highly speculative and providing safety of invested funds can be a tough task.
Economic Times, September 17, 2012
17 Sep, 2012, 05.00AM IST, The writer has posted comments on this article Shaji Vikaraman & Hema Ramakrishnan,ET Bureau
Government mulls financial products to dampen gold demand
The government and financial sector regulators-the Reserve Bank of India and the Securities and Exchange Board of India -are in discussions to launch financial products intended to discourage demand for gold in its physical form.
MUMBAI/NEW DELHI: The government and financial sector regulators-the Reserve Bank of IndiaBSE 3.74 % and the Securities and Exchange Board of India -are in discussions to launch financial products intended to discourage demand for gold in its physical form and excessive speculation in real estate.
Data released by RBI last month showed that financial savings of Indian households, as a proportion of GDP or national income, fell to 7.8% in 2011-12 from 12.2% in 2009-10 because of a decline in small savings and slower growth in households' holdings of bank deposits, currency and life funds. Instead, households favoured investing in gold, which is considered to be a safe haven and an effective hedge against inflation.
A senior finance ministry official said that the government is considering the feasibility of introducing instruments linked to gold, though a final decision is yet to be taken.
In the past, the government had launched gold bond schemes including offering amnesty to those with unaccounted funds to prompt them to channelise money for productive uses rather than hoarding the physical asset. But these schemes had had little impact.
India imports a huge quantity of gold which has an impact on the current account deficit (CAD)-the excess of imports of goods and services over exports. A rising CAD puts pressure on the rupee. India's CAD was 4.1% of GDP for the year ended 31 March 2012, well above the comfort level of policy-markers. India imported gold worth $60 billion in FY12 compared to $40 billion a year ago, one of the reasons for widening of the current account deficit.
The other financial product which policy makers want to work on is one linked to real estate and generates reasonable returns in order to curb speculative activity. That may be a tough task considering that four years after Sebi unveiled rules for real estate mutual funds, not a single scheme has been launched.
Fund houses and regulatory officials say that difficulties in calculating Net Asset Value or NAV for schemes linked to realty and the absence of real estate regulator have dampened interest. In the case of gold, there are already products such as gold exchange-traded funds that track the price of physical gold. These are easy to buy, tradeable and more tax efficient.
The Chairman of the Prime Minister's Economic Advisory Council C Rangarajan has said that an attractive product linked to the price of gold could help put brakes on a growing number of people buying gold as a hedge against inflation.
There are products overseas including gold derivatives, but they are highly unlikely to be considered in the local markets. According to Dhirendra Kumar of Value Research, which tracks mutual funds, the best way to discourage excessive consumption of gold is to get the economy back on track. "The safest way to deal with such a situation is to ensure that the economy is on track as stocks and bonds will do well rather than issuing gold bonds," he said.
Readers' opinions (5)
MVK (HYDERABAD)
17 Sep, 2012 10:02 AM
GOI should create New PSU to Produce GOLD in India and abroad to meet ever increasing gold demand. Banks should reduce gold loans.Raise Import Duty on Gold .Gold is selling Globally at DOUBLE the Cost of Production.
Agree (0)Disagree (0)Recommend (0)Offensive
gopalkiran.123 (mumbai)
17 Sep, 2012 09:01 AM
can someone tell the figure how much in percent term was added to our economy by amnesty scheme and gold bond scheme as I believe Govt must launch gold bond scheme along with amnesty scheme as this will reduce the role of paralel economy increasing the percentage of funds regularised and put to productive use.This will further reduce the black money in gold and construction sector thus reducing our current account deficit and saving in foreign exchange as lower gold will be imported.Treating people with sugar instead of bitter pills will be in the interest of people as well as government.
Agree (0)Disagree (0)Recommend (0)Offensive
M G WARRIER (MUMBAI)
17 Sep, 2012 09:01 AM
This is an initiative in the right direction. Market and analysts will always resist or try to discourage such moves, as the ‘margins’ come down as transparency and availability of user-friendly financial instruments increase. Perhaps RBI and GOI could consider introducing new and innovative instruments in mutual fund and prepaid payment instruments segments. If half the effort GOI is taking to market a still-born product like New Pension Scheme even before a supporting legislation is in place to promote gold-backed financial instruments on the lines suggested by Dr Rangarajan or even Gold-backed Debit Cards(GDC), the investor perception will change. If a depositor agrees to maintain an average balance of a pre-decided amount, his account should be credited with gold of equivalent value and issued a GDC which he can use to withdraw cash, make payments and buy things like any other debit card, but his balances in the account will vary with the price of gold any day. This is just an example. Similar instruments against commodities and services could be thought of. Real estate related financial instruments can turn out to be highly speculative and providing safety of invested funds can be a tough task.
Agree (0)Disagree (1)Recommend (0)Offensive
kishor (india)
17 Sep, 2012 08:03 AM
loan facility on GOLD by banks and other financial institutions should be limited to Rs.50000/- per person which should be strictly by AADHAR number,linkage of all banks for gold loans and only once. HOPE demand for pysical gold be reduced.Interest rates on deposits should be increased.
Agree (0)Disagree (2)Recommend (0)Offensive
Ulysses (USA)
17 Sep, 2012 05:54 AM
Since 1970 the Indian rupee has lost 99.5% of its purchasing power while gold has gained 300%. In other words, "saving" in fiat currency has been a recipe for disaster. Is it any wonder that the public prefers to put its savings in gold? If the public is expected to save, then they must be given something worth saving.
Agree (9)Disagree (0)Recommend (1)Offensive
M G WARRIER (MUMBAI)
17 Sep, 2012 09:01 AM
This is an initiative in the right direction. Market and analysts will always resist or try to discourage such moves, as the ‘margins’ come down as transparency and availability of user-friendly financial instruments increase. Perhaps RBI and GOI could consider introducing new and innovative instruments in mutual fund and prepaid payment instruments segments. If half the effort GOI is taking to market a still-born product like New Pension Scheme even before a supporting legislation is in place to promote gold-backed financial instruments on the lines suggested by Dr Rangarajan or even Gold-backed Debit Cards(GDC), the investor perception will change. If a depositor agrees to maintain an average balance of a pre-decided amount, his account should be credited with gold of equivalent value and issued a GDC which he can use to withdraw cash, make payments and buy things like any other debit card, but his balances in the account will vary with the price of gold any day. This is just an example. Similar instruments against commodities and services could be thought of. Real estate related financial instruments can turn out to be highly speculative and providing safety of invested funds can be a tough task.
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