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Market regulator Sebi has clamped down on new launches of gold exchange traded funds (Gold-ETFs) as the product is seen to be fueling demand for the yellow metal and contributing significantly to the current account deficit. The market watchdog has turned down a number of applications for new gold ETFs though there is no formal change in the policy for these instruments that allow paper-investing in gold.
"All gold ETFs have to backed by physical gold and thus new products can also fuel demand...There is no policy decision but no new products are being approved," a Sebi official told ET. Sebi had in January allowed gold ETFs, investment product akin to mutual funds, to invest up to 20% of total assets in gold deposit schemes of banks. This was done with the objective to utilise their idle assets of the precious metal for more productive purposes. The regulator now feels that the time is not right to encourage gold ETFs.
Gold imports in the first four months of the current year rose 87% to 383 tonnes. New ETF launches can increase demand at a time government has been taking steps to discourage purchases. India's $88 billion current account deficit in 2012-13 was third highest in the world contributed largely by inflexible imports of gold, oil and coal.
Country imported $ 52.5 billion worth of gold and silver in 2012-13 and a demand compression of the commodity can help moderate the current account deficit. However, experts say gold holding of etfs is insignificant.
''Total gold holding of etfs is not much...''said Indranil Pan chief economist Kotak Mahindra Bank. India's high current account deficit and concerns over its funding amidst rising chances that the US Fed will start tapering its $85 billion a month bond-buying programme have caused a rapid depreciation of the rupee. Indian rupee has fallen over 17% in the new financial year.
Policymakers have unveiled a number of steps including a plan to rein it at $70 billion or 3.7% of the GDP in the current financial year, and more could be announced once Raghuram Rajan takes over as the governor of the Reserve Bank of India later this week.
Metal holding of the gold ETFs doubled to 38 tonnes at the end of March 2013 from 19 tonnes at the end of March 2011. The government has already raised import duties on gold, the third time this year in August, to 10% while the RBI separately imposed restrictions on imports including a ban on coin and medallion imports . Forward Markets Commission raised the initial margin on gold futures to 5 % of the value of contract from 4%, on all the exchanges in the country. (Economic Times)
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