India's Gold Deposit Scheme "Risks Rupee Sell-Off"

Likelihood, value and risks of gold deposit proposals questioned by analysts...

 

GOLD DEPOSIT schemes now being developed by the Reserve Bank of India could have the opposite effect to what the government intends, according to a new research report, potentially denting the Rupee after this year's all-time lows on the currency market.

 

The gold deposit plans would see gold owners in India – the world's largest consumer of the metal – give their gold to a bank and earn interest in return. They would also enjoy a "guarantee" from the central bank for the gold's full return at the end of the deposit period. The RBI would then lend the deposited gold to jewelry manufacturers, reducing the country's need for imported bullion and so easing pressure on the Rupee.

 

But "we think communication is key here," says Societe Generale in a special report, India in Focus. "If not handled well, [the gold deposit scheme] could send a distress signal and spark a sell-off in the Rupee."

 

Last week the Reuters newswire reported a tie-up between Bank of Nova Scotia, a major gold bullion importer to India, and the All-India Gems & Jewellery Trade Federation. The discussions seek to attract privately-owned gold bullion and jewelry into bank deposits, so the metal can be used to supply the domestic gold industry in the absence of imports.

 

Gold imports to India fell almost to zero over summer 2013, thanks to high import duties and strict rules demanding that 20% of any inbound shipment be set aside for re-export.

 

"A key target [for the gold deposit scheme] is the gold held by temples," says a note from Swiss investment bank Credit Suisse. "That is potentially a large source of metal, one estimate suggests that the governing bodies of the three largest temple organizations own around 3,500 tonnes."

 

However, "there is some skepticism about whether the plan will work in practice," says Credit Suisse, "in particular whether temples will be willing to place gold, which may not have previously been declared, on deposit with the RBI."

 

Moreover, says Societe Generale's special report, "we can say the Rupee has in fact been quite immune to India's gold and oil imports." Because statistical analysis of the Rupee's movements on the currency market showed only a "low" relationship with the volume of Indian oil imports, and a "negligible" relationship with gold inflows.