Limitations on new Indian gold deposit scheme could be dropped – WGC

May 21, 2015 - 3:09 PM GMT

The minimum quantity of gold that is required under India’s new gold monetisation scheme may ultimately be removed, Somasundaram PR, managing director in India at the World Gold Council, told FastMarkets.

Under new draft proposals that were announced on Tuesday, the minimum quantity of gold that can be deposited will be 30 grams, lower than the previous 500 grams.

“I would have preferred it to be without any limits – we suggested one gram – like Turkey does,” Somasundaram said. “But it’s only a matter of time before the [limits] go away anyway. If it’s successful, they will reduce it absolutely – the limit has no meaning.”

The programme aims to monetise domestic inventories of around 20,000 tonnes of gold, thereby lowering annual imports of around 1,000 tonnes and easing the country’s current account deficit.

Still, previous incentive schemes have failed to garner the interest of Indian consumers. And in this case, feedback delivered to date suggests there are concerns that banks will be able to determine their own interest rates on deposited gold.

But clarity and realistic rates will only emerge once the country’s regulator has fully outlined the operational guidelines, Somasundaram said, adding that banks being able to determine rates could be beneficial.

“If the banks do not have the right incentives, it might just end up like the old scheme,” he said. “It was the right thing to do – as it will generate a little bit of healthy competition.”

Interest rates of just 0.75 percent on the previous deposit scheme attracted around 15 tonnes of gold during the 15 years it was active.

Feedback has suggested that a minimum interest rate of two or three percent would be required under the new scheme to persuade Indian consumers to deposit their gold with banks although, according to the proposals, interest earned will be exempt from income and capital gains tax.

And allowing banks to hold deposited gold on their balance sheets might incentivise them to ensure the programme is successful and provide competitive interest rates.

The scheme would probably operate in a similar fashion to Turkey’s Reserve Option Mechanism (ROM), which allows commercial banks to hold up to 30 percent of their statutory reserves in gold and foreign currencies.

That scheme, which is widely regarded to have been a success, taps into the large volume of physical gold held by Turkish citizens, estimated to be more than 2,000 tonnes.

The policy theoretically reduces volatility in the Turkish exchange rate, reduces the impact of foreign currency inflows and reduces the cost of banks meeting reserve requirements. By doing so, it also encourages banks to buy gold while also allowing private citizens to deposit their gold with banks.

New Delhi’s proposals are practical and it is clearly not trying to rush the process, Somasundaram said.

“Once the incentive framework falls into place to the satisfaction of the banks, customers and others, we will own a ‘Uniquely Indian’ scheme that allows gold to become a dynamic, fungible asset in the hands of gold savers with significant benefits to the economy, and therefore provide the gold trade with consistent policies,” he added.

“Based upon the success of the previous scheme, under the new scheme, even if we collect just 20 tonnes – it will be deemed a success,” he said.

(Editing by Mark Shaw)