With the various measures put in place by the government and the Reserve Bank of India (RBI) not yielding the desired results, the government is likely to take more steps to curb the rising imports of gold which may include a ban on sale of gold coins by banks.
The government is worried over the widening current account deficit (CAD), largely on account of the runaway rise in imports of the yellow metal which stood pegged at 162 tonnes during May alone. “For May, the import of gold was 162 tonnes,” Finance Minister P. Chidambaram told reporters after the seventh meeting of the Financial Stability Development Council (FSDC) here.
Ostensibly, apart from other issues such as the asset quality of banks and capital adequacy of the country’s banking sector, ways to curb gold imports was a major topic of discussion. “The Council noted with concern the significant increase in gold imports in recent months and deliberated on the issues involved in this regard,” the Finance Ministry said in a statement on the meeting.
The seriousness of the issue can be gauged from the fact that the sub-committee of the FSDC headed by RBI Governor D. Subbarao also deliberated on ways of stemming gold imports. “More steps will have to be taken to reduce gold imports. Export-import policy on gold will have to be reviewed…may consider banning gold coin sale by banks,” Department of Economic Affairs Secretary Arvind Mayaram said after the sub-committee meeting.
While the government had raised the duty on gold to restrict its import, the measure did not appear to yield any dividend as high imports of the yellow metal pushed the CAD to a record high of 6.7 per cent of gross domestic product (GDP) in the October-December quarter of 2012-13. Last month, the RBI imposed curbs on gold import by banks and also imposed restrictions on them and non-banking finance companies (NBFCs) to check loans against gold coins as well as units of gold ETFs (exchange traded funds).
As for the banking sector, the FSDC, at its meeting, maintained that the strong capital adequacy of banks would enable the banking system to withstand stress despite the concerns about some deterioration in asset quality, largely on account of global and domestic economic conditions.
At the meeting, which was attended, among others, by RBI Governor D. Subbarao, Chief Economic Advisor Raghuram G. Rajan and top officials of the Finance Ministry and all the financial sector regulators, the FSDC also took note of the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) which submitted its report in March this year.
“The Council felt that while some of the major legal and institutional reforms suggested by the Commission [FSLRC] would take time to be examined and taken forward, action on other recommendations could be taken up separately in consultation with various stakeholders,” the Finance Ministry statement said.