Nine months after it clamped down on gold imports, the Reserve Bank of India has partly eased some of the restrictions, which will now increase the supply of gold through legal channels. The controls were imposed in August last year when the rupee was spiralling downward following worries over the rising current account deficit (CAD) and the U.S. Federal Reserve’s move to taper its bond-buying programme. Though seen as highly restrictive, especially by the jewellery trade, the RBI’s measures delivered as gold imports, which were rising unabated and exerting pressure on the external account, dwindled to a trickle in the following months. This eased the pressure on the CAD, which at one time was projected to be close to 5 per cent for 2013-14 leading to fears of a drain on forex reserves. With the CAD now under control (projected to be a little over 2 per cent in 2013-14 compared to 4.8 per cent in the previous fiscal) and the rupee appreciating past the 59-to-a-dollar mark, the unwinding of the controls was probably inevitable. The mismatch caused by a consistent growth in demand for gold and restricted supply led to an increase in smuggling over the last few months. Representations made to the central bank by the jewellery trade, which was groaning under the impact of the strict measures, were a major factor behind the RBI easing up a bit now.

What is interesting, though, is that the RBI has still not reverted to its position prior to the rupee turbulence. So, even if more entities such as star trading houses and premier trading houses can import gold now, the 20:80 scheme (a fifth of the gold imported has to be used for exports by jewellery manufacturers) remains, and the quantum of gold that each such entity can now import is capped at the highest level of monthly imports by them in the 24 months prior to August 2013. Similarly, while banks can now fund gold imports by jewellery manufacturers, the quantum is restricted to the outstanding gold loans in their books as of March 2013. It is clear that the central bank, while acknowledging the changed situation on the external front, has chosen to retain caution. Though the rupee has changed direction for the better, the fact remains that the economy is still on the mend and the external account still needs to be supported. By holding on to some of its restrictions, the RBI has probably created space for the new government to reduce import duty on gold, if it chooses to. Gold prices dropped to a 10-month low on May 23 after the RBI eased up. And if the government decides to reward the jewellery industry manufacturers, who constitute one of the core constituencies of the BJP, with a cut in import duty, the trade and consumers alike will have even more reason to rejoice.

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