Informist, Thursday, Jul 11, 2024
By Sandeep Sinha and Sayantan Sarkar
MUMBAI/NEW DELHI – There is scope for the Reserve Bank of India to buy more gold for its reserves, and the trend shows it is moving in the right direction, says Sachin Jain, India region chief executive officer of the World Gold Council.
"The reports coming out of the RBI suggest the central bank's (gold) buying has been consistent," Jain tells Informist in an interview. “Now, to what level (the RBI can purchase), I don't have that sort of outlook on what the government is thinking."
Global central banks, including the RBI, have been on a gold-buying spree these past few years as the yellow metal is a sought-after safe-haven asset during periods of geopolitical turmoil. In the first five months of 2024, the RBI bought nearly 37 tn of gold. The central bank bought 200 tn for its reserves in November 2009 from the International Monetary Fund, which remains its highest purchase in a calendar year. Additionally, since 2018, the RBI has been purchasing gold every year, and the average annual purchase in the six years till 2023 is around 41 tn, data from the WGC show.
Jain says greater digitisation of gold is the way to curb smuggling in India. "Smuggling and other unscrupulous things have to be booked as a criminal act, and they have to be dealt with strongly," he says. But, according to Jain, the 18.5% import duty on gold in India is too high, and a big incentive for unscrupulous play.
Additionally, Jain urges the government to regulate the digital gold market in India, which has huge potential for the country. "Bring out rules and regulations and issue licences to people," he says. "The risk is that I could be a very important individual, but I am building the rules and regulations in my own way, and you are doing it in your way. But the consumer is probably the person who is taking the highest risk."
The following are edited excerpts from the interview:
Q. What is the outlook for gold demand during the upcoming festival and wedding season in India?
A. We are positive about how India has been consuming gold. This year has been one of the strongest Akshaya Tritiya we have witnessed as the price of gold was the highest ever. Gold sales are usually slow in July and August, but these two months tend to be very active in terms of preparation for domestic consumption in the following months. There is a belief that the level of pricing is well established. There is no apprehension in the minds of consumers around this level of pricing, which is a great starting point.
Historically, an election year tends to be very strong in terms of gold consumption. So, this is one of those years. It also tends to be a very important year because, generally, the economy sees more money. With all these factors, the 2024 festival season looks promising.
Q. What is your view on the current record-high prices in the domestic market and its impact on consumer behaviour?
A. In April, when gold prices were extremely high, we had projected imports in 2024 to be around 700-800 tn. If there is a lot of volatility in gold prices over the next few months, imports will be around 700 tn. If prices remain steady, imports could touch 800 tn. Logically, if the price of gold is high, then retail demand suffers. But we have not witnessed that during festivals. We think there is an acceptance at this price level and demand for gold will not be affected if there is a slight rise in prices.
Q. Against the backdrop of heightened geopolitical tensions, do you see global central banks continuing their purchases of gold with the same intensity?
A. I think the reason why central banks have been buying tends to be about the non-conformity of the geopolitical situation. Now, to your point, I don't think there will be complete peace in every part of the world immediately, or there is going to be any dramatic war in any part of the world. Who knows?
However, some central banks have stalled or softened their gold buying. Now, whether that's temporary, we don't know. Historically, geopolitical tension or uncertainties tend to kick off central bank buying. So it's actually a mix. We really don't know what's going to happen. But if you see the reports coming from the RBI, their buying has been consistent.
Q. What is your opinion on the RBI's gold holdings? Is it enough for the government to use their reserves to safeguard against emergencies?
A. Well, I wish I had the knowledge to answer that. I am not in a position to comment. But if you do a comparison of who is holding what, it will provide a clearer picture. We are at about 840 tn of gold, compared with the US, which has 8,133.5 tn. Gold reserves in Germany are at 3,351.5 tn. Now, from that sense, is there scope for more gold in a country like India? I certainly feel yes. Now, what level is the right number? I don't have that sort of outlook and what the government is thinking. But, certainly, the RBI is moving in a direction which indicates that gold reserves are likely to rise.
Q. Do you see the record-high price of gold promoting smuggling? How can we restrict smuggling?
A. This is an ongoing conversation that the industry has been having with the government. There are two or three aspects to this. If you look at our import duty, it is at 18.5?ter factoring in the goods and services tax. Now, if you compare that to other markets, it is substantially higher. The differential is a big incentive for unscrupulous play. That is without a doubt.
There is a notion that reduction of import duty will bring down smuggling activities. And, recently, I heard that even with such a high import duty in India, imports are not affected. So, it's actually a double-edged sword.
The way forward is more digitisation of gold. I'm sure the government will look at it in a holistic way. Smuggling and other unscrupulous things have to be booked as a criminal act, and they have to be dealt with strongly. The industry feels that the government should reduce the import duty on gold.
Q. In the coming years, will consumers prefer investing in digital gold rather than the physical form? Has there been any change in the pattern over the past few years?
A. It is a great question because, if you look at the consumers, they are young and evolving, and living on their smartphones. That's where their life is. In South India, nearly all weddings take place with at least a kilogram of gold. Will it happen in the same way in the future? Perhaps not. But the interest in gold is still as much. Digital gold is a very big opportunity for India, because it connects to the new-age consumer very well as it is a very easy and secure form of buying gold. The issue is that digital gold is not a regulated product yet. We believe regulators should get involved in regulating this product as soon as possible.
Q. What kind of measures are required from the government to incentivise digital gold in the country?
A. I think they will have to regulate it. Right now, anyone can start a digital gold company and set their own rules, where the consumer tends to be most fragile. So, all I ask from the government today is to regulate the product. Bring out rules and regulations and issue licences to people.
If you have to be in this business, this is the way to do it. Today, that doesn't exist. The risk is that I could be a very important individual, but I am building the rules and regulations in my own way, and you are doing it in your way. But the consumer is probably the person who is taking the highest risk.
Q. Gold loan portfolios of banks and non-banking finance companies have risen sharply in the last few years. What kind of challenges does this pose?
A. Firstly, these gold loans have been a great boost to the industry. If gold loans are going up, then more of the yellow metal is coming into the market systematically through banks. These are the good things that have happened with gold loans.
Now, when gold prices go from 50,000 rupees per 10 gm to 70,000 rupees per 10 gm, the loan book goes up without anything else rising. And suddenly, if gold prices fall from 70,000 rupees to 50,000 rupees, and if I'm a retailer, my collateral to the government or the bank has to go up as well. So, the question is whether the consumer will be able to back it with increased asset value.
There was a recent banking conference where a lot of conversation revolved around whether the banks would be open to funding not just the big players in the market, but also the small guys. Perhaps the loan funding should be available to all levels of retailers, not because they are big or small, but because they are willing to do things the right way.
Q. Currently, almost 15% of recycled gold comes into the market every year. Do you think this percentage will increase as we consume more gold?
A. Well, I hope it does! There is a notion that imported gold lies in homes. If we make it easy for the consumer, then they will come out. Because I think Indian households do not use all the gold that they hold.
Q. How do you see rural demand this year, with the India Meteorological Department forecasting an above-normal monsoon?
A. The reality is that 68% of our population still lives in rural India. Agriculture is the main source of livelihood. Yes, of course, there will be more money in the hands of the end consumers and gold is a preferred area of investment. So, it's logical. End
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