Gold and the Union Budget 2015 -16 : How We Can , and Cannot , Reduce Gold Imports
By VK Sharma
Former Executive Director
Reserve Bank of India
vksvs2009@gmail.com +919820267474
1. Hon’ble Finance Minister deserves unreserved compliments for explicitly and unequivocally acknowledging in his Budget speech the imperative of reducing gold imports which were the single cause of the unprecedented 30+ year-high current account deficit of 4.7% of GDP in FY 2013 with gold imports accounting for 3%+ !
2. The main reason for this was that under the then current import regulations(cf RBI’s FEMA Master Circular), there was preferential, and more favourable , treatment for gold imports as compared to import of any other item,including essential imports, in that import of gold was permitted 1) on consignment basis 2) on unfixed price basis and 3) metal loan basis. This preferential treatment made gold imports free from both price and currency risks for overseas consignors of gold borrowed overseas as effectively it amounted to their short selling such borrowed gold in India and simultaneously covering their short position abroad, with both the risks being borne by end buyers of jewellery and gold ETFs ! This was not the case though with other items,say,coal,edible oils etc , imported on direct import basis. I had accordingly , in December 2012, suggested to the then Governor, Dr Subbarao and the present Governor Dr Raghuram Rajan , then Chief Economic Advisor, Ministry of Finance , to create a level playing field between gold and non gold imports by aligning gold import regulations under FEMA with those for non gold but essential imports . And indeed, aligning gold import regulations with the rest of imports by RBI had the desired effect of taking away this significant, unwarranted and perverse incentive and delivered the desired outcome of dramatically reducing gold imports in double quick time, merely by creating a level playing field between the two kinds of imports so much so that ,as its direct consequence , the current account deficit narrowed dramatically to 1.7 % of GDP in FY 2014 ! And this was achieved , as I said, not by imposing curbs and restrictions on gold imports , as was widely made out in media campaign by some quarters , but merely by creating a level playing field between gold and non gold imports , by aligning gold import regulations under FEMA 1999 with those for non gold , but essential, imports like , as I mentioned above , edible oil and coal !
3. But surprisingly , RBI only recently rolled back these entirely wholesome and fair measures and no wonder , according to media reports , gold imports have again surged and the current account deficit for the latest fiscal quarter has increased to 2.1% from 1.2% of GDP ! Against the background as somber as above, to reduce gold imports, Hon’ble Finance Minister has proposed in his Budget three schemes and his verbatim statement on which in the Budget Document is as follows:
” India is one of the largest consumers of gold in the world and imports as much as 800-1000 tonnes of gold each year. Though stocks of gold in India are estimated to be over 20,000 tonnes, mostly this gold is neither traded, nor monetized. I propose to:
(i) Introduce a Gold Monetisation Scheme,which will replace both the present Gold Deposit and Gold metal Loan Schemes. The new scheme will allow the depositors of gold to
earn interest in their metal accounts and the jewelers to obtain loans in their metal account. Banks/other dealers would also be able to monetize this gold.
(ii) Also develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold. The Bonds will carry a fixed rate of interest, and also be redeemable in cash in terms of the face value of the gold, at the time of redemption by the holder of the Bond.
(iii) Commence work on developing an Indian Gold Coin, which will carry the Ashok Chakra on its face. Such an Indian Gold Coin would help reduce the demand for coins minted outside India and also help to recycle the gold available in the country. ”
4 . The proposed Sovereign Gold Bond Scheme is ,in its design and logic, exactly like a Gold ETF ( Exchange Traded Fund) with the difference that the latter doesn’t pay any interest but delivers gold returns to investors by investing the entire proceeds of subscription in metal gold which is held in demat form ! Significantly, all the 14 Gold ETFs in India ,between them, hold no more than 40 to 50 tonnes of gold, which is a mere 5% of annual gold imports of 800 to 1000 tonnes mentioned by Hon’ble Finance Minister! So a gold ETF does not at all reduce metal gold demand and all it does is substitute gold demand from individual metal gold investors with like demand from a professionally and expertly managed gold ETF instead ! Exactly so will also be the case if the Government does the same to deliver gold returns to Sovereign Gold Bond holders on redemption ! In the highly unlikely event of Government even remotely contemplating using the subscription proceeds for a purpose other than investing only in metal gold will expose it to extreme price risk as it will be committed to delivering gold returns to bond investors on redemption at the ruling gold price ! This is because this will amount to Government incurring huge short position in gold potentially exposing the exchequer to gold price increases ! A sense can be had of the enormity of this proposition by considering the fact that gold price moved all over from a then all time high of $ 850 per oz in late seventies to a life time low of $ 270 in the late nineties and then back up to an all time high of $ 1920 in September 2011 !! Assuming the worst case , and hence the most prudent and conservative scenario , of gold price rising from its recent low of $ 1180 per oz to its all time high of $ 1920 ( 65 % increase) due possibly to potential monetary stimulus in Japan and Eurozone , the resulting shock could be fiscally overwhelming and way too disruptive . The rationale for this is that if we again assume conservatively that Gold Bonds would attract the equivalent of 1000 tonnes of annual gold import demand , it will translate into the rupee equivalent of ₹ 1.5 lakh crores ( $ 25 billion ) of net loss on redemption not counting the interest paid which will ,all else being equal , increase fiscal deficit by like amount because of subscription proceeds not being invested fully in metal gold ! Any multiple of 1000 tonnes will have multiplier effect and in the extreme scenario of the theoretically maximum subscription equivalent to the entire metal gold stock in India of 20000 tonnes , will translate into a whopping net loss of around ₹ 30 lakh crores ($ 485 billion) to the exchequer on redemption at the assumed ruling price of gold of $ 1920 per oz and ,as stated before , will , all else being equal, increase fiscal deficit by like amount, representing 20% of the current GDP ! Not only this , large investors in Sovereign Gold Bonds could also cause the so called short squeeze , close to the due date of redemption , to profit at the expense of Government by speculatively pushing gold price higher fully aware that the Government is hugely short in gold , making the above mentioned whopping net loss to the exchequer even worse !
5. Contextually, in February 2013 , someone from Commodity Exchange space , who should have known better, had proposed a variant on the theme of the above Gold Bond Scheme . He suggested that the subscription proceeds of the sovereign gold bonds be invested in infrastructure projects and to deliver gold returns to bond holders without price risk and loss , Government may hedge its price risk by buying gold call options ! But this hedging proposition , involving buying gold call options covering ,as stated in the preceding paragraphs, 1000 tonnes worth of annual gold import demand , while tenable in theory of options , will be untenable in practice as this will inundate call option writers/sellers and result in call options getting deep-in-the-money because of resultant price increase way above the starting strike price at which Government will buy these call options , pushing the delta hedge ratio to almost 1 which would mean call options writers will have to physically buy almost 1000 tonnes of the metal , leaving the physical metal gold demand in the domestic market pretty much the same, if not more, and which anyway, as now, will only be imported ! This will also apply just as much to Government seeking to hedge against gold price increase by buying gold futures because given the sheer size of the the hedging demand , call options and futures will both have the hedge ratio of 1 meaning that the demand for the metal gold will be about 1000 tonnes; only that it will shift from Government to the metal gold market and which , if not supplied in the domestic market will , as now, have to be met through imports ! This is the very basic theory and practice of futures and options hedging and pricing which is governed by the so-called no-arbitrage argument or,what is the same thing as,the law of one price. In other words, there can be no free lunch or the case of eating one’s cake( investing cash proceeds of gold bond sales in projects and not in gold) and having it too( replicating and delivering gold returns without investing in physical gold) !! In a lighter vein , if only to dramatise to best effect , the analogy of futures and options hedging with a dialogue of the character Gabbar Singh in film Sholay is most apt and I quote : ” Oh village folks if there is anyone who can save you from Gabbar, he is none other than Gabbar himself !” So also ” If there is any asset which can deliver gold returns with gold price risk, it is none other than gold itself !” Of course, the same holds for any other asset like equity stocks, bonds, foreign currency, real estate etc ! So to conclude, the proposed Sovereign Gold Bond Scheme will not deliver in practice !
6. Turning to the other Budget proposal on the so called monetisation of 20000 tonnes of domestic stock of gold which ,as Hon’ble Finance Minister very rightly observed in his speech, is mostly neither traded nor monetised, I will begin with his own statement that the domestic metal gold stock is mostly not traded . Of course, globally, deep and liquid metal gold deposit and lending markets exist but only for two reasons; the first being active trading and the second gold miners borrowing metal gold to raise money at ultra low interest rates to fund their capital investment in either new mines or in expansion of their existing mines . And there there is no third reason for this !
7. The dynamic of the global gold deposit and lending markets in New York, London, Singapore and Hong Kong involves gold borrowing demand coming from short sellers and large gold miners . In particular, short selling arises from speculators, hedge funds and other participants betting on declines in gold price so that they can make profit from their bet coming right by buying back gold at a price lower than the price at which they originally short sold and repaying the metal gold loan ! But since there is the market discipline of delivery into a short sale, short sellers have necessarily to borrow metal gold to deliver into the short sale which gets adjusted after some time when short sellers either buy metal gold back to cut their losses due to stop loss limits or to book their profits and using the gold so bought back for repaying the borrowed gold !
8. Another reason for short selling metal gold is engagement by market participants in cash futures arbitrage when gold futures are cheaper relative to the spot market i.e. when no-arbitrage argument /law of one price of derivatives is violated . What then they actually do is buy cheaper gold futures and short sell expensive gold in the spot market and carrying the arbitrage trades into maturity and earning totally risk free profits due to such mis pricing. Such arbitrage trades continue until, as a result of these trades , such price discrepancy eventually disappears ; the faster this happens ,the more efficient the markets ! Since globally there is large scale demand for such borrowed metal gold , supply comes from gold deposits and , like in any bank deposit and loan market , there are deposits and lending/borrowing rates known as gold lease rates and these are way too low compared to currency rates because they are in theory and practice nothing but the difference between the uncollateralised currency interest rates and and those collateralised by metal gold . Specifically, when gold is short sold , the sale proceeds of short sale are used by the short sellers to collateralise their borrowing of metal gold borrowing which amounts to lending by short sellers of cash from short sale to metal gold lenders at an interest rate lower than the interest rate they will lend at otherwise ; the more desperate the metal gold borrowers are to borrow, the less interest rates they will charge to the lender of the metal gold and so much higher will be the metal gold lease rates ! On the other hand in an aggressive bull market in gold when prices shoot up , the demand for borrowed gold will relatively be far lower and ,therefore, gold lease rates will be lower and can be, and have indeed been, negative !! These gold lease rates are in both theory and practice a fraction of a currency ‘s interest rates ! Illustratively, currently these are 0.09 % , 0.11% , 0.15 % , 0. 25% and 0.40% for 1 month , 2 months, 3 months, 6 months and 1 year , respectively! Incidentally, in the Indian context , there has been frequent demand from some quarters that interest rates paid on gold deposits be higher than currently paid without appreciating the fact that each asset has its own yield curve like for example just as you cannot pay Indian Rupee rates on yen and dollar deposits , so also you cannot pay Indian rupee interest rates on gold deposits ! Coming back to gold lease rates , they have also been negative during the episodes of aggressive bull market in gold when lenders of metal gold far exceed the borrowers of gold to a point that lease rates become zero but there are still storage and insurance costs which make effective lease rates negative!
9. As I mentioned above , other than short sellers and arbitrageurs there is only one more kind of metal gold loan borrowers , namely, large gold miners who borrow metal gold for longer periods to sell the metal in the spot market and use the sale proceeds to fund capital investment in new mines or in capacity expansion of their existing gold mines and have a natural hedge against gold price rise as they use the metal gold mined to repay their metal gold loans without any price risk and thus have the natural advantage of raising capital at a fraction of cost of debt and equity capital unlike other non gold businesses !
10. Significantly, as regards lending gold to jewellers , to call it a metal gold loan is an oxymoronic misnomer because, effectively and substantively, it is simply nothing but a sale and purchase transaction as , both in finance theory and practice, a deposit and lending transaction is one where whatever is borrowed has necessarily to be repaid like ,for example, businesses in India borrow in rupees and generate rupees and thus repay in rupees . So also, jewellers borrowing metal gold will only generate rupees by selling jewellery in the domestic market , and certainly not gold , and so will have necessarily to buy metal gold back from the domestic market and which, if not supplied locally , will again only be imported to repay gold borrowed , and to that extent it is no brainer to see that the proposed monetisation scheme will not deliver in terms of reducing gold imports ! In other words, one will be back to a square one !!
11. So to conclude whether the proposed gold deposit and lending scheme will deliver in practice will depend critically on whether we have in India both active gold trading involving ,as I said before, short selling and arbitraging and gold mines of global scale ! And as we already know the above necessary and sufficient conditions are not satisfied in the Indian context . In view of the foregoing reasons , both the Sovereign Bond Scheme and Gold Monetisation Scheme will not deliver ! What , however , will is what actually and effectively did only as recently as in 2013-14 , that is, restoring by RBI of the status quo ante by again creating level playing field between gold and non gold imports by stopping gold imports on 1) consignment basis 2) unfixed price basis and 3 ) metal loan basis !
By VK Sharma
Former Executive Director
Reserve Bank of India
vksvs2009@gmail.com +919820267474
1. Hon’ble Finance Minister deserves unreserved compliments for explicitly and unequivocally acknowledging in his Budget speech the imperative of reducing gold imports which were the single cause of the unprecedented 30+ year-high current account deficit of 4.7% of GDP in FY 2013 with gold imports accounting for 3%+ !
2. The main reason for this was that under the then current import regulations(cf RBI’s FEMA Master Circular), there was preferential, and more favourable , treatment for gold imports as compared to import of any other item,including essential imports, in that import of gold was permitted 1) on consignment basis 2) on unfixed price basis and 3) metal loan basis. This preferential treatment made gold imports free from both price and currency risks for overseas consignors of gold borrowed overseas as effectively it amounted to their short selling such borrowed gold in India and simultaneously covering their short position abroad, with both the risks being borne by end buyers of jewellery and gold ETFs ! This was not the case though with other items,say,coal,edible oils etc , imported on direct import basis. I had accordingly , in December 2012, suggested to the then Governor, Dr Subbarao and the present Governor Dr Raghuram Rajan , then Chief Economic Advisor, Ministry of Finance , to create a level playing field between gold and non gold imports by aligning gold import regulations under FEMA with those for non gold but essential imports . And indeed, aligning gold import regulations with the rest of imports by RBI had the desired effect of taking away this significant, unwarranted and perverse incentive and delivered the desired outcome of dramatically reducing gold imports in double quick time, merely by creating a level playing field between the two kinds of imports so much so that ,as its direct consequence , the current account deficit narrowed dramatically to 1.7 % of GDP in FY 2014 ! And this was achieved , as I said, not by imposing curbs and restrictions on gold imports , as was widely made out in media campaign by some quarters , but merely by creating a level playing field between gold and non gold imports , by aligning gold import regulations under FEMA 1999 with those for non gold , but essential, imports like , as I mentioned above , edible oil and coal !
3. But surprisingly , RBI only recently rolled back these entirely wholesome and fair measures and no wonder , according to media reports , gold imports have again surged and the current account deficit for the latest fiscal quarter has increased to 2.1% from 1.2% of GDP ! Against the background as somber as above, to reduce gold imports, Hon’ble Finance Minister has proposed in his Budget three schemes and his verbatim statement on which in the Budget Document is as follows:
” India is one of the largest consumers of gold in the world and imports as much as 800-1000 tonnes of gold each year. Though stocks of gold in India are estimated to be over 20,000 tonnes, mostly this gold is neither traded, nor monetized. I propose to:
(i) Introduce a Gold Monetisation Scheme,which will replace both the present Gold Deposit and Gold metal Loan Schemes. The new scheme will allow the depositors of gold to
earn interest in their metal accounts and the jewelers to obtain loans in their metal account. Banks/other dealers would also be able to monetize this gold.
(ii) Also develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold. The Bonds will carry a fixed rate of interest, and also be redeemable in cash in terms of the face value of the gold, at the time of redemption by the holder of the Bond.
(iii) Commence work on developing an Indian Gold Coin, which will carry the Ashok Chakra on its face. Such an Indian Gold Coin would help reduce the demand for coins minted outside India and also help to recycle the gold available in the country. ”
4 . The proposed Sovereign Gold Bond Scheme is ,in its design and logic, exactly like a Gold ETF ( Exchange Traded Fund) with the difference that the latter doesn’t pay any interest but delivers gold returns to investors by investing the entire proceeds of subscription in metal gold which is held in demat form ! Significantly, all the 14 Gold ETFs in India ,between them, hold no more than 40 to 50 tonnes of gold, which is a mere 5% of annual gold imports of 800 to 1000 tonnes mentioned by Hon’ble Finance Minister! So a gold ETF does not at all reduce metal gold demand and all it does is substitute gold demand from individual metal gold investors with like demand from a professionally and expertly managed gold ETF instead ! Exactly so will also be the case if the Government does the same to deliver gold returns to Sovereign Gold Bond holders on redemption ! In the highly unlikely event of Government even remotely contemplating using the subscription proceeds for a purpose other than investing only in metal gold will expose it to extreme price risk as it will be committed to delivering gold returns to bond investors on redemption at the ruling gold price ! This is because this will amount to Government incurring huge short position in gold potentially exposing the exchequer to gold price increases ! A sense can be had of the enormity of this proposition by considering the fact that gold price moved all over from a then all time high of $ 850 per oz in late seventies to a life time low of $ 270 in the late nineties and then back up to an all time high of $ 1920 in September 2011 !! Assuming the worst case , and hence the most prudent and conservative scenario , of gold price rising from its recent low of $ 1180 per oz to its all time high of $ 1920 ( 65 % increase) due possibly to potential monetary stimulus in Japan and Eurozone , the resulting shock could be fiscally overwhelming and way too disruptive . The rationale for this is that if we again assume conservatively that Gold Bonds would attract the equivalent of 1000 tonnes of annual gold import demand , it will translate into the rupee equivalent of ₹ 1.5 lakh crores ( $ 25 billion ) of net loss on redemption not counting the interest paid which will ,all else being equal , increase fiscal deficit by like amount because of subscription proceeds not being invested fully in metal gold ! Any multiple of 1000 tonnes will have multiplier effect and in the extreme scenario of the theoretically maximum subscription equivalent to the entire metal gold stock in India of 20000 tonnes , will translate into a whopping net loss of around ₹ 30 lakh crores ($ 485 billion) to the exchequer on redemption at the assumed ruling price of gold of $ 1920 per oz and ,as stated before , will , all else being equal, increase fiscal deficit by like amount, representing 20% of the current GDP ! Not only this , large investors in Sovereign Gold Bonds could also cause the so called short squeeze , close to the due date of redemption , to profit at the expense of Government by speculatively pushing gold price higher fully aware that the Government is hugely short in gold , making the above mentioned whopping net loss to the exchequer even worse !
5. Contextually, in February 2013 , someone from Commodity Exchange space , who should have known better, had proposed a variant on the theme of the above Gold Bond Scheme . He suggested that the subscription proceeds of the sovereign gold bonds be invested in infrastructure projects and to deliver gold returns to bond holders without price risk and loss , Government may hedge its price risk by buying gold call options ! But this hedging proposition , involving buying gold call options covering ,as stated in the preceding paragraphs, 1000 tonnes worth of annual gold import demand , while tenable in theory of options , will be untenable in practice as this will inundate call option writers/sellers and result in call options getting deep-in-the-money because of resultant price increase way above the starting strike price at which Government will buy these call options , pushing the delta hedge ratio to almost 1 which would mean call options writers will have to physically buy almost 1000 tonnes of the metal , leaving the physical metal gold demand in the domestic market pretty much the same, if not more, and which anyway, as now, will only be imported ! This will also apply just as much to Government seeking to hedge against gold price increase by buying gold futures because given the sheer size of the the hedging demand , call options and futures will both have the hedge ratio of 1 meaning that the demand for the metal gold will be about 1000 tonnes; only that it will shift from Government to the metal gold market and which , if not supplied in the domestic market will , as now, have to be met through imports ! This is the very basic theory and practice of futures and options hedging and pricing which is governed by the so-called no-arbitrage argument or,what is the same thing as,the law of one price. In other words, there can be no free lunch or the case of eating one’s cake( investing cash proceeds of gold bond sales in projects and not in gold) and having it too( replicating and delivering gold returns without investing in physical gold) !! In a lighter vein , if only to dramatise to best effect , the analogy of futures and options hedging with a dialogue of the character Gabbar Singh in film Sholay is most apt and I quote : ” Oh village folks if there is anyone who can save you from Gabbar, he is none other than Gabbar himself !” So also ” If there is any asset which can deliver gold returns with gold price risk, it is none other than gold itself !” Of course, the same holds for any other asset like equity stocks, bonds, foreign currency, real estate etc ! So to conclude, the proposed Sovereign Gold Bond Scheme will not deliver in practice !
6. Turning to the other Budget proposal on the so called monetisation of 20000 tonnes of domestic stock of gold which ,as Hon’ble Finance Minister very rightly observed in his speech, is mostly neither traded nor monetised, I will begin with his own statement that the domestic metal gold stock is mostly not traded . Of course, globally, deep and liquid metal gold deposit and lending markets exist but only for two reasons; the first being active trading and the second gold miners borrowing metal gold to raise money at ultra low interest rates to fund their capital investment in either new mines or in expansion of their existing mines . And there there is no third reason for this !
7. The dynamic of the global gold deposit and lending markets in New York, London, Singapore and Hong Kong involves gold borrowing demand coming from short sellers and large gold miners . In particular, short selling arises from speculators, hedge funds and other participants betting on declines in gold price so that they can make profit from their bet coming right by buying back gold at a price lower than the price at which they originally short sold and repaying the metal gold loan ! But since there is the market discipline of delivery into a short sale, short sellers have necessarily to borrow metal gold to deliver into the short sale which gets adjusted after some time when short sellers either buy metal gold back to cut their losses due to stop loss limits or to book their profits and using the gold so bought back for repaying the borrowed gold !
8. Another reason for short selling metal gold is engagement by market participants in cash futures arbitrage when gold futures are cheaper relative to the spot market i.e. when no-arbitrage argument /law of one price of derivatives is violated . What then they actually do is buy cheaper gold futures and short sell expensive gold in the spot market and carrying the arbitrage trades into maturity and earning totally risk free profits due to such mis pricing. Such arbitrage trades continue until, as a result of these trades , such price discrepancy eventually disappears ; the faster this happens ,the more efficient the markets ! Since globally there is large scale demand for such borrowed metal gold , supply comes from gold deposits and , like in any bank deposit and loan market , there are deposits and lending/borrowing rates known as gold lease rates and these are way too low compared to currency rates because they are in theory and practice nothing but the difference between the uncollateralised currency interest rates and and those collateralised by metal gold . Specifically, when gold is short sold , the sale proceeds of short sale are used by the short sellers to collateralise their borrowing of metal gold borrowing which amounts to lending by short sellers of cash from short sale to metal gold lenders at an interest rate lower than the interest rate they will lend at otherwise ; the more desperate the metal gold borrowers are to borrow, the less interest rates they will charge to the lender of the metal gold and so much higher will be the metal gold lease rates ! On the other hand in an aggressive bull market in gold when prices shoot up , the demand for borrowed gold will relatively be far lower and ,therefore, gold lease rates will be lower and can be, and have indeed been, negative !! These gold lease rates are in both theory and practice a fraction of a currency ‘s interest rates ! Illustratively, currently these are 0.09 % , 0.11% , 0.15 % , 0. 25% and 0.40% for 1 month , 2 months, 3 months, 6 months and 1 year , respectively! Incidentally, in the Indian context , there has been frequent demand from some quarters that interest rates paid on gold deposits be higher than currently paid without appreciating the fact that each asset has its own yield curve like for example just as you cannot pay Indian Rupee rates on yen and dollar deposits , so also you cannot pay Indian rupee interest rates on gold deposits ! Coming back to gold lease rates , they have also been negative during the episodes of aggressive bull market in gold when lenders of metal gold far exceed the borrowers of gold to a point that lease rates become zero but there are still storage and insurance costs which make effective lease rates negative!
9. As I mentioned above , other than short sellers and arbitrageurs there is only one more kind of metal gold loan borrowers , namely, large gold miners who borrow metal gold for longer periods to sell the metal in the spot market and use the sale proceeds to fund capital investment in new mines or in capacity expansion of their existing gold mines and have a natural hedge against gold price rise as they use the metal gold mined to repay their metal gold loans without any price risk and thus have the natural advantage of raising capital at a fraction of cost of debt and equity capital unlike other non gold businesses !
10. Significantly, as regards lending gold to jewellers , to call it a metal gold loan is an oxymoronic misnomer because, effectively and substantively, it is simply nothing but a sale and purchase transaction as , both in finance theory and practice, a deposit and lending transaction is one where whatever is borrowed has necessarily to be repaid like ,for example, businesses in India borrow in rupees and generate rupees and thus repay in rupees . So also, jewellers borrowing metal gold will only generate rupees by selling jewellery in the domestic market , and certainly not gold , and so will have necessarily to buy metal gold back from the domestic market and which, if not supplied locally , will again only be imported to repay gold borrowed , and to that extent it is no brainer to see that the proposed monetisation scheme will not deliver in terms of reducing gold imports ! In other words, one will be back to a square one !!
11. So to conclude whether the proposed gold deposit and lending scheme will deliver in practice will depend critically on whether we have in India both active gold trading involving ,as I said before, short selling and arbitraging and gold mines of global scale ! And as we already know the above necessary and sufficient conditions are not satisfied in the Indian context . In view of the foregoing reasons , both the Sovereign Bond Scheme and Gold Monetisation Scheme will not deliver ! What , however , will is what actually and effectively did only as recently as in 2013-14 , that is, restoring by RBI of the status quo ante by again creating level playing field between gold and non gold imports by stopping gold imports on 1) consignment basis 2) unfixed price basis and 3 ) metal loan basis !
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