Opinion Golden rule

In spite of the recent spike in gold imports — they were up by 280 per cent to $ 4.17 billion in October — the RBI surprised the market this Friday by rightly scrapping its regressive “20:80 scheme”, which compelled traders to export a fifth of the gold they imported. This rule was put in place last year, alongside a 10 per cent import duty (up from 2 per cent) and bars on who could import gold, in response to the burgeoning current account deficit and the rapidly depreciating rupee.
But these measures, which amounted to financial repression, are believed to have led to a surge in smuggling activity and hurt the domestic jewellery industry. By doing away with this ill-advised policy, not only has the RBI restored calm to the market, which was, on the contrary, expecting more curbs, it has also removed a distortion. Players will now be free to respond to market signals.

Gold is the classic store of value, it is a hedge against high inflation and becomes more attractive when people lose faith in other investment instruments. In India, gold imports started rising dramatically 2008-09 onwards — while we imported $ 28.8 billion worth of gold in 2009-10, this increased to $ 40.7 billion in 2010-11 and $ 56.5 billion in 2011-12. Part of the reason for this was the structurally high inflation in India. Also, globally, investors, including central banks, were losing confidence in fiat currencies and there was a move towards investing in gold — from $ 766 per troy oz in 2007-08, prices peaked at $ 1,654 in 2012-13. But instead of addressing the illness, India’s response was to treat the symptom. The current account deficit is firmly under control, particularly due to declining oil prices — brent crude oil is at a four-year low of $ 73. And inflation, too, seems to be under check — in fact, most gold imports today seem to be genuine consumer demand rather than for investment purposes. There was, therefore, elbow room and a strong case to remove import curbs.
The use of instruments of financial repression sends out a disquieting signal to the outside world. In future, it would be better to keep the focus on tackling the disease, not the symptom.