Gold prices have fallen while the import duty on the yellow metal has risen in India. Will AMCs stop selling fresh units to help curb the current account deficit?

1. Will Gold ETFs be affected?
Gold prices have fallen while the import duty on the yellow metal has risen in India. Will AMCs stop
selling fresh units to help curb the current account deficit?
Author : iFast Content Team
The large current account deficit (CAD) is making a lot of entities jittery. The wariness of
Foreign Institutional Investors (FIIs) is evident in them pulling out their money. The
government is naturally concerned too. And since gold is the highest contributor to India’s
import bill after petroleum, the government has waged war against gold.
As gold prices tumbled across the globe, Indians were only more than happy to increase their
purchases. To counter this development, the government kept hiking the import duty on gold.
This seems to have had the desired effect on demand. It has been reported that gold imports are
expected to more than halve to about 150 tonnes in the coming quarter (July-September 2013)
against the projected 350 tonnes in the current quarter.
The Reserve Bank of India (RBI), on its part, has directed banks not to provide loans against
gold jewellery and coins. The central bank has also requested banks to restrict lending against
units of gold exchange-traded funds (ETFs).
Jewellers are giving the impression of being supportive. The Gitanjali Group feels that measures
for reducing gold imports need to be supported but is also of the stance that the government
needs to address the issue of how the CAD can be reined in without impacting the jewellery
industry. Zaveri and Co, which apparently imported about 2 tonnes in May 2013, stated that
they are helping the government by telling everyone not to buy gold.
Reliance Capital became the first company to suspend gold sales. Sam Ghosh, CEO, was quoted
in Reuters as saying that imports have “placed an unbearable burden on the current account
deficit and are severely hurting the country's growth prospects." Reliance Capital will stop
selling gold in a physical form, including the sale of coins through India Post. The company’s
commercial finance division will also stop lending against gold as security.
It has also been reported that Reliance Capital Asset Management is planning to suspend new
subscriptions in Reliance Gold Savings Fund — a gold-backed ETF. Do note, this is NOT in effect
yet and will take place only once regulatory approval is obtained by the Securities and Exchange
Board of India (SEBI). But investors need not worry. It will not impact the gold currently held by
the ETF. And should there be any restriction in the future with regards to fresh lumpsum
investments and new systematic investment plans (SIPs), existing SIP investors will NOT be
affected by this decision.
Keep an eye out for SEBI's verdict and what Reliance AMC decides to do. It will be indicative of
the actions that will be taken by other fund houses as well.
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