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Gold News Flash
21 August 1997
PROGRESS TOWARDS GOLD LIBERALISATION
AND CAPITAL ACCOUNT CONVERTIBILITY IN INDIA
RESERVE BANK OF INDIA RECOMMENDS THAT GOLD LIBERALISATION
BE USED AS A PILOT TO TEST CAPITAL ACCOUNT CONVERTIBILITY
India on the way to gold market liberalisation
The Union Finance Minister Mr. P Chidambaram in his budget
speech for 1997-98 had asked The Reserve Bank of India (RBI)
to appoint a group of experts to lay out the road map towards
Capital Account Convertibility (CAC).
The Committee released its recommendations on 3rd June 1997.
Among other recommendations for Capital Account Convertibility,
the committee expressed the opinion that ".....Capital
Account convertibility is inextricably linked with liberalisation
of the gold regime in India."
The Committee recommended a three phase transition towards
convertibility. Since gold liberalisation is seen as an ideal
way to test capital account convertibility and the extent
of capital flight, if any, the recommendations on gold are
included in Phase One which commences in the financial year
1997-98. The following recommendations have been made with
regard to gold in Phase One:
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Banks and financial institutions fulfilling well defined
criteria to be allowed to operate freely, both in the
domestic and international markets.
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Sale of gold by banks and financial institutions to be
freely allowed to all residents.
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Banks to be allowed to offer gold denominated deposits
and loans.
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Banks fulfilling well defined criteria may be allowed
to provide working capital gold loans to jewellery manufacturers
and traders.
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Banks may be allowed to offer deposit schemes akin to
GAP's (Gold Accumulation Plans).
The Committee recommended that in Phase Two, i.e. 1998-99,
both the government and the RBI will establish steps to develop
a gold market in India including gold derivatives and forward
trading. Both residents and non-residents would be allowed
to operate in this market subject to well defined guidelines.
WGC’s role in the liberalisation process
WGC has been actively working to allow freer flows of gold
into the country and allow banks in India to deal in gold
and gold related products, and in a short time good progress
has been made.
WGC brought gold to the centre stage of economic thinking
in India through its Gold Economic Conference held in November
1996 in New Delhi. Since then, three significant developments
took place in quick succession:
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The Finance Minister increased the Non-Resident Indian
Baggage Allowance from 5 kilos to 10 kilos of gold every
6-months, effective 31st December 1996.
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The Exim (Export/Import) Policy for 1997 - 2002 released
on 1st April 1997 added to the list of nominated agencies
allowed to import gold "any agency authorised by
the Reserve Bank of India". Further to this announcement,
the RBI invited all "scheduled commercial banks
to apply for licences to import gold". In July,
the RBI spelt out 5 eligibility criteria for banks to
be allowed to import gold covering capital requirements,
capital adequacy ratio, risk management systems, history
of regulatory compliance and gold-related experience.
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And finally the Capital Account Convertibility recommendations
on gold.
Keeping up the momentum for change
To maintain the momentum and assist in the actual implementation
of gold banking, WGC held a two day Gold Banking
Seminar on 2-3 August in New Delhi. The Seminar
was aimed at:
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Accelerating the implementation of imports through
the banking channels.
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Gaining wider acceptance of the CAC recommendations
on gold amongst policy makers and opinion leaders in
the government and the industry.
Targetted Benefits
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The banking sector will provide a legal channel for
imports of gold thereby bringing the gold industry in
India above ground. This will create a more acceptable
environment for large corporations in India to deal
in gold and gold jewellery fabrication, leading to a
more efficient market.
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The banking sector with its large distribution network
will make gold and gold related products available across
the country and ensure regular and streamlined supplies.
Import of gold through the banking sector will bring down
the local premiums, fuelling consumer demand in the world’s
largest gold market.
Capital Account convertibility report is available on the
World-wide Web at:
http://www.reservebank.com
Keynote Addresses given at the Gold Banking Seminar:
Y.V.
Reddy, Deputy Governor, Reserve Bank of India
S.S.
Tarapore, Chairman of the Committee on Capital Account
Convertibility
P.P.
Prabhu, Commerce Secretary, Government of India
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