Dr C. Rangarajan says Need to Tame Inflation to Contain Gold Demand

New Delhi: Taming the inflation and increasing the rate of return on financial products is the best way to contain demand for gold in India thereby reducing the adverse impact on current account deficit, chairman of Economic Advisory Council to the Prime Minister (PMEAC), Dr C. Rangarajan said at an ASSOCHAM event held in New Delhi today.

“The government together with the Reserve Bank of India (RBI) has taken certain steps to contain demand for gold and these actions have been supplemented by the fact that inflation is coming down  and consequently returns on financial products will be more attractive and help contain the demand for gold,” said Dr Rangarajan while inaugurating the ‘6th International Gold Summit,’ organised by The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

“There has been a sudden surge in the import of gold in recent years due to increase in demand for gold as an investment or as an asset and this has had an adverse impact upon the current account deficit (CAD),” said the chairman, PMEAC.

On the rise in deficit in April 2013, Dr Rangarajan said, “The April 2013 deficit has gone up primarily due to sudden rise in gold imports partly due to sudden fall in the gold prices and people wanting to take its advantage, therefore, the demand was front-loaded and that is why the deficit has gone up.”

“But as the gold prices remain stable, the demand may come down,” he added.

He further stressed that it is urgently imperative to contain gold imports. “We need to bring down the demand for gold from current level of 1,000 tonnes per year to a level of 700 tonnes.”

Dr Rangarajan also suggested an efficient market for gold in India. “Given the fact that total quantum of gold that is sold and bought is very large, we need an efficient market for gold in this country and so attention must be placed on creating an appropriate market both in the spot and futures to meet the vast demand for gold in an efficient manner.”

The PMEAC chief suggested a three-pronged strategy for containing and consequently reducing the gold demand and gold imports. “First and foremost we must tame inflation and simultaneously make return on financial assets more attractive as this would help in reducing attraction of gold as an asset.”

He further emphasised on ensuring that financial products including the bank deposits and mutual fund products give adequate return.

“Secondly, some fiscal and administrative actions which have recently been taken by the government like hike in the import duty on gold would also help curbing the gold demand and its imports,” said Dr Rangarajan. “Thirdly, improving the institutional mechanisms for domestic gold trading is another way to reduce demand for gold imports considering the asymmetry in the way with which gold can be bought or sold.”

Amid others who also addressed the ASSOCHAM Gold Summit included: Somasundaram PR, MD (India), World Gold Council; Stefanus Botes, minister counselor (Economic), South Africa High Commission; Venkat Chary, chairman, MCX; Rajkumar Dhoot, president, ASSOCHAM; S.K. Jindal, chairman ASSOCHAM Investment & Investors’ Protection Committee; S.C. Aggarwal, chairman, ASSOCHAM Capital Market Committee and D.S. Rawat, secretary general.

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