Restricting gold supply will not be effective: P.R. Somasundaram

Among India's major imports, gold irks Finance Minister P. Chidambaram considerably. Its sizeable flow into the country contributes significantly to increasing the already-stretched current account deficit. Indians are the largest buyers of gold in the world. With the rupee hitting a record low, an anxious government and the Reserve Bank of India have been taking measures to rein in gold imports. World Gold Council's India Managing Director P.R.Somasundaram, however, tells K.R. Balasubramanyam that the demand for gold may rise to anything between 865 and 965 tonnes in 2013 compared to 864.2 tonnes in 2012. Since most of India's gold demand is met through imports, it implies that, despite the restrictions, India might see higher gold imports in 2013 than the 860 tonnes in 2012. Edited excerpts:

Where is gold import headed?
In India, gold imports are headed for record levels in the second quarter of 2013. We anticipate 300 tonnes to 400 tonnes of imports in the second quarter, which would be almost half total imports of last year. We expect as much as a 100 per cent year-on-year increase. This is driven by India's love of gold and acceptance of gold-backed solutions.

How do you view the recent government measures to reduce gold imports?
Curbing supply may have a short-term benefit, but will not reduce demand, which might be met by unauthorised channels. This will not be positive for either the economy or society. The demand for gold is very innate in India. The nature of the demand at the retail level is such that restricting supply will not be effective in the long run. It is likely to lead to non-transparent price premiums in the market.

How do you see demand for the next three months leading into the festival season? And how does this compare against the June demand?
India's love for gold is timeless. Regardless of market sentiments, retailers prefer buying physical gold on auspicious days. As it happens there are 20 per cent more such days this year as compared to 2012. With the wedding and festive season in last quarter of 2013, we believe the demand outlook remains strong and the long-term fundamentals of the gold market stay intact.

Our market update report that was launched in May this year indicates that the demand for gold will be higher in the post-monsoon season. Despite the price fall in April, sentiment towards gold in the two largest markets of India and China is still extremely positive. Seventy per cent of consumers in India and China expect the price to stay stable or to rise in the next 12 months. Looking at the trend this year, we expect gold demand to be around 865-965 tonnes for 2013.

How do gold imports affect the Indian economy?
Globally, India is the largest consumer of gold. Most of the demand is met via imports. While we are aware that a large current account deficit is unsustainable and needs to be checked, there are a number of factors which influence the current account deficit in India of which gold is one.

Demand for gold is driven by a diverse range of factors. These should be taken into account in India. Addressing this demand by curbing supply will boost unauthorised channels leading to undesirable consequences for the economy.
 
How should the current account deficit be kept within reasonable limits?
India is a significant stakeholder in the gold market holding over 20,000 tonnes. It is in the hands of millions of people. Policy direction should view gold as a strategic asset for India and its citizens. We support the objective to monetize the nation's gold stock to boost economic growth.

As the market development authority for gold, we understand the investment benefit gold offers in India. We also understand its role as a risk mitigation asset. It is our endeavour to drive conversations around gold demand and to create new and innovative gold based solutions. Gold has a special status socially, culturally and economically in the minds of Indians.

In the current situation we see an increased need to monetise the existing and future stock of gold. We work towards bringing capital into the financial system for productive purposes. We believe that by enhancing the efficiency of the market with different measures - standardisation of gold, development of central utility functions, investment in infrastructure, etc - we will be able to drive the demand for gold in the long-term as well.

India's gold import bill has risen eight times in the last five years. Is the RBI taking measures to bring imports down?
We understand that part of the rationale for seeking to curb gold imports is to reduce the current account deficit. We recognise that a large current account deficit is unsustainable and needs to be checked. However there are a number of factors which influence the current account deficit in India of which gold is one. Demand for gold, whether in the form of jewellery or investment (bars and coins), is driven by millions of individuals investing as part of their household savings. People buy gold as a long-term investment to protect their wealth. Gold has huge significance socially, emotionally and economically in India.

Addressing this demand by curbing supply may have a short term benefit but this demand will be met by the grey market (smuggling). It will not be positive for either the economy or for society.

Gold holding with the ETF (Exchange-Traded Fund) is seeing a rapid decline. Your views.
The first half of 2013 saw strong consumer demand for gold in the form of jewellery, bars and coins, particularly in Asia. However there was a significant outflow in ETFs due to price drop and higher volatility. Demand in the ETF market mirrors demand in the physical market. We should see Indian investors returning to ETF soon.