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India "Can't Risk" Easing Gold Import Rules as Trade Deficit Jumps

Slight relaxation by RBI central bank "explains spike", domestic holdings to be tapped...
GOLD IMPORT rules in India – the world's No.1 consumer nation – won't be relaxed further according to government sources after new trade data showed inflows jumping in June.
Gold bullion was the "major contributor" to India's total imports rise of 8.3% from May, taking the country's trade deficit to $11.8 billion despite strong growth in its exports.
Blamed for the huge drag on India's current account deficit which sparked the Rupee's drop on the currency market to record lows in 2013, gold imports were effectively banned last summer by a series of rules.
The Reserve Bank of India then allowed some trading houses to join those commercial banks allowed to import gold earlier this year.
Gold imports rose 65% by value in June, the data show, and with the Rupee now falling again, MiningWeekly in Kolkata quotes a senior official in the Finance Ministry's Department of Revenue calling the trade deficit spike "a cause of concern".
"I do not think we can take a risk by cutting duties" the Department is quoted by The Telegraph India.
Over the fiscal year 2013-2014, India cut its current account deficit with the rest of the world from 4.7% to 1.7% of GDP, finance minister Arun Jaitley noted this month in the new BJP government's first Budget.
But failing to ease gold import controls as India's jewelry industry had hoped, "This was mainly achieved through restriction on non-essential imports and a slowdown in overall aggregate demand," said Jaitley.
"Going forward, we must continue to be watchful of the CAD."
Gold smuggling may have risen six-fold since last summer's new rules, reaching perhaps 200 tonnes on one estimate to raise India's current account deficit by 30%.
June's legal gold imports rose 65% from a year before to $3.1bn – "perhaps explained by partial easing in import restrictions in the middle of the first quarter," says a note from Yes Bank Ltd, which calls the spike "a one-off distortion."
Faced with that surge in illegal imports, plus ongoing calls to ease the gold-import rules from leading jewelry figures – who openly backed BJP leader and now prime minister Narendra Modi at May's general election – the Reserve Bank last week announced a plan to swap old gold bars held in India's reserves for newer, market-acceptable gold bars held in its account at the Bank of England in London.
The old gold will then be sold for domestic use.
Domestic supplies may be eased further following a change to "gold deposit scheme" rules, the Business Standard reports. India's new Companies Act sets the maximum interest rate which gold depositors can earn to 12.5%, and also bars jewelry companies from accepting total deposits over 25% of their corporate worth.
Redemptions may total $3.3bn by value says the paper, with market-leader Tanishq already closing its gold deposit scheme and asking customers to collect either cash or their gold out at the equivalent of $165m.

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