India Eases Gold Import Restrictions to Remove Trade Distortions

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Gold Imports in India
Merchandise sits on shelves at the Lac Bangle store in the Old City area of Jaipur, Rajasthan, India. Rules requiring importers to sell 20 percent of their shipments to jewelers for re-export as jewelry were withdrawn effective immediately, the Reserve Bank of India said yesterday. Photographer: Udit Kulshrestha/Bloomberg

India, the world’s second-biggest user of gold, eased import regulations on the metal to remove distortions in shipments and curb smuggling.

Rules requiring importers to sell 20 percent of their shipments to jewelers for re-export as jewelry were withdrawn effective immediately, the Reserve Bank of India said yesterday.

The changes are likely to improve stocks for jewelers, lower procurement costs and help contain illegal trade in the metal. Gold imports in India, which accounted for 25 percent of the total global demand, plunged last year when the government imposed curbs to narrow a record current-account deficit and stop a slump in the rupee.

“This is really good news for the industry as it was creating chaos for importers, traders, and jewelers,” Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation, said by phone in Kolkata. “The 20:80 rule was not helping the industry or the government. It was only increasing smuggling.”

Concerns about the current-account deficit remain, and the industry worries that the government may try to control gold imports in different ways, he said.

The decision to ease restrictions “surprised” markets that had anticipated the possibility of tighter rules being introduced, UBS Group AG analysts Edel Tully and Joni Teves wrote in a note yesterday.

“The removal of the main constraint on the supply chain should be positive for gold as it frees up the inflow of the metal into India, where appetite has remained quite healthy,” Tully and Teves said.

Imports

The government increased import taxes three times in calendar 2013 to 10 percent and levied the 20:80 rule. After the curbs cut imports and narrowed the current-account deficit to about $32.4 billion in fiscal year 2013-2014, compared with a record $87.8 billion the year before, the government on May 21 eased controls, allowing more trading houses to bring in the metal.

Imports in October jumped to about 150 metric tons, the highest in the fiscal year started April 1, people with knowledge of the matter said on Nov. 13. India imported about 640 tons of gold in the fiscal year that ended March 31, the people said.

Overseas purchases in the April 1 to Nov. 15 period jumped to 710 tons, a finance ministry official who ask not to be identified in line with departmental policy said yesterday.

Predictions

Because of the May 21 rule changes, only six institutions were benefiting from the 20:80 rules, which was resulting in higher margins for them and also was encouraging smuggling, the finance ministry official said in New Delhi. Fake gold jewelry exports were occurring and that had created trade distortions, he said.

Illegal inflows into India may be about 200 tons this year, the World Gold Council said on Nov. 13. Gold is bought during festivals in India and for weddings as part of the bridal trousseau. The festival season runs from late August to October and is followed by the wedding season.

The Gold Council yesterday reiterated its prediction that Indian gold demand for the year will be from 850 to 950 tons. “Sharp import hikes in recent months were not triggered by changes in demand estimates but more likely to be a result of expectations of additional curbs,” P.R. Somasundaram, the Gold Council’s managing director for India said in an e-mailed statement.

Gold for immediate delivery in London dropped 1.3 percent to $1,177.40/oz yesterday. Futures on the Multi Commodity Exchange of India have fallen 8.4 percent this year to 26,029 rupees ($418) per 10 grams.

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