The Reserve Bank of India (RBI) has made its strongest pitch ever for the opening up of the Indian Gold markets. At the recent World Gold Council seminar on gold banking, two key speakers, Y V Reddy, deputy governor and Usha Thorat, chief general manager, department of external investments and operations, spoke on the financial markets reform expected for gold and the rationale of a new gold policy.
The key issues being raised regarding the new gold policy were:
nIf imports are further liberalised and taxes reduced, would the consumption of gold increase as what happened when the NRI route for imports was opened?
nIn what form would the financial markets in gold be structured so that the industry fulfils its due role in the economy?
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* The type of gold instruments in the financial markets which can be introduced.
* Phases of development of the financial markets
* The ingredients of a well regulated forward or futures market/exchange.
It is important to ensure that in a freer regime, (as advocated by the Committee on Capital Account Convertibility) despite rigid controls, the appetite to acquire and hold more gold is fulfilled. market will facilitate the gold economy to come into its own.
Simultaneously, the long term strategy should be to ensure that the rupee is stable in terms of internal and external purchasing power thereby diminishing the demand for gold as an inflation hedge as has been shown by global trends.
Secondly, as income levels increase, there is bound to be some increase in the demand for gold (which has been witnessed recently). It is critical that in such times, the financial markets reaches out to all sections of society offering both savings and loan products.
On the issue of development of the financial markets for gold instruments, the main focus of the RBI is that the final customer should be provided the price of gold which is closest to the international price.
The customer should be able to liquidate holdings quickly with low losses other than the movement in the spot price of gold at the markets).And there should be products as good as gold which may not result in any delivery of gold but offer all the features of gold,.which in other words calls for the growth of a derivatives market.
In Phase I of the development of gold markets, authorised dexalers could be allowed to offer gold denominated bonds /deposits and loans carrying a nominal rate of return.
This would enable an investor to get the benefit of having invested in gold In Phase II, derivatives instruments could be introduced.
It would be necessary at later stages to regulate the gold markets and develop a transparent cash and futures market, procedures for membership, price fixing, settlement, delivery, centralised clearing and settlement at an exchange.