S S Tarapore, former deputy governor of the Reserve Bank of India (RBI), made a strong pitch for the setting up of a gold exchange and introduction of a gold mutual fund.
Speaking at the World Gold Council conference on "The gold market -- future direction" today in New Delhi, Tarapore added that an amendment in the Reserve Bank of India (RBI) Act was necessary, enabling it to undertake an active management of its gold reserves.
Tarapore urged the setting up of a bullion exchange to facilitate free trade in gold and thereby activate Indian gold hoarding reportedly in the range of 10,000-13,000 tonne.
"The idea of a gold bank, which was seriously contemplated by the authorities in 1992, later got jettisoned. This needs to be revived and preferably left to private initiative," said Tarapore.
The RBI should support the development of a gold exchange through an existing exchange such as the National Stock Exchange, added Tarapore.
Apart from operating as an active spot market, the exchange could also develop forward and futures market as well as gold derivatives products with proper safeguards.
Tarapore also mooted the idea of a gold mutual fund, which would deal in gold and gold derivatives. In the past, when Tarapore was at the RBI, the central bank had also shot down this idea, he stated.
Pressing for a liberal gold regime which would exude confidence in the economy and discourage hoarding of gold stocks, Tarapore also urged for amending the RBI Act.
While the central bank can buy and/or sell gold, it cannot lease gold or undertake gold-currency swaps or use other derivatives instruments.
"Gold should be treated as any other reserve asset, enabling RBI to undertake any type of operation in gold as it can in other reserve currencies," said the former RBI deputy governor.
RBI's gold reserves have fallen to six per cent against 20 per cent of the total reserves a few years ago. While the objective would be to enhance the gold reserves to the 20 per cent proportion over a period of time, Tarapore said this would be possible only with an active management of its gold reserves.
Citing the risks and large losses that RBI ends up taking as a result of a paralysis in its gold policy, Tarapore suggested that the central bank ought to undertake small sales and purchases of gold in the international market. This would help the RBI take a view on the future gold prices. He further added that considering the gold price fluctuations that take place through the year, RBI could earn a reasonable rate of return. "If India continues to follow the present insensate policy of paralysis in management of its gold reserves it will continue to pay a very high price," said Tarapore.
