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India to Review Gold Import Policy Amid Record Deficit

India, the world’s largest bullion consumer, plans to review import policy after shipments surged in the past two months, threatening to widen a record current-account deficit.

The country can’t afford high levels of purchases and policies will be reassessed if needed, Finance Minister Palaniappan Chidambaram told reporters in New Delhi today. He didn’t specify what changes could be made. Imports may have been about 162 metric tons in May, the Finance Ministry said.

India tripled a tax on imports since January last year to 6 percent and placed curbs on purchases by banks after bullion in April slumped the most in three decades, sparking a buying frenzy for jewelry, coins and bars. The Reserve Bank of India may ban all importers from shipping the metal on a consignment basis, a Finance Ministry official told reporters in New Delhi today, asking not to be identified citing government rules.

“There is very little room for the government to have any measure by which they can reduce the demand,” said Madan Sabnavis, chief economist at Credit Analysis and Research Ltd. “Maybe they can increase the tariff on gold further and make gold more expensive. Demand for gold won’t ease unless prices go higher and pressure on the deficit will remain.”

Deficit Risk

The current-account deficit, the broadest measure of trade, widened to $32.6 billion in the last quarter of 2012 on gold and oil imports and subdued exports, according to the central bank. The Reserve Bank has said the imbalance is the biggest risk to the $1.9 trillion economy.

Gold and silver imports more than doubled to $7.5 billion in April, according to the Commerce Ministry. Chidambaram’s estimate of shipments for May seemed too high, Haresh Soni, chairman of the All India Gems & Jewellery Trade Federation, said by phone from New Delhi.

“India cannot afford to import 262 tons of gold a month,” Chidambaram said. “Necessarily, we will have to check” the imports, he said.

Consumption Record

Demand is poised for a quarterly record as imports reach 300 tons to 400 tons in April-June, the World Gold Council said May 29. That’s equal to almost half last year’s total purchases.

Bullion entered a bear market in London in April as investors sold the metal in favor of riskier assets on speculation that the global economy was recovering. Gold plunged 14 percent in the two days through April 15, the biggest such drop since 1983, and is set to snap a 12-year bull rally.

Spot gold gained as much as 1 percent to $1,401.95 an ounce and was at $1,395.32 at 4:54 p.m. in Mumbai. Prices fell 6 percent last month, taking losses to 17 percent this year.

Demand in India may rebound from August because of festivals and weddings, the jewelry federation’s Soni said.

“The months of June-July are seasonally low-demand months as there are no weddings or festivals and farmers get busy with planting,” Soni said. “The volatility in prices has also kept buyers away. From August, we expect more demand from the rural areas if monsoon is good.”

Monsoon Boost

The monsoon, which accounts for more than 70 percent of annual rainfall, is forecast to be normal this year, the India Meteorological Department said on April 26. Rains reached the southern state of Kerala on June 1, two days ahead of the date forecast by the weather bureau.

Good rains boost incomes of farmers, who invest in gold mainly as savings. Buying gold is considered auspicious in India during religious festivals and weddings. The festivals start in August and end in November, and are followed by the wedding season.

“Unless they put in physical restrictions on the amount of gold that can be imported, nothing will matter in terms of lowering the consumption,” Sabnavis said. “Controlling household investment is a major challenge. Because every time the price falls they are going to buy gold and that is going to put pressure on imports.”

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