Filed 20 March 2013, 14:37 IST. Every price, volume and forecast below is reproduced as published on that date and is not a current quotation. For how the benchmarks themselves are set, see how gold is priced.
The Reserve Bank of India was considering a prohibition on commercial banks selling gold coins to retail customers, and had already restricted lending against gold by non-banking finance companies. Both measures belonged to a sequence aimed at the country's gold import bill, which was second only to crude oil and was widely blamed for the pressure on the current account.
Banks had become a significant retail distribution channel for gold coins, which meant the formal financial system was itself importing metal to sell to savers, an awkward position for a central bank trying to reduce imports. Closing that channel was administratively simple in a way that raising duty again was not.
The logic, and its limit
The measure targeted supply through a regulated channel. Its weakness was that the demand behind that channel was not created by it: a saver prevented from buying a coin at a bank counter could buy from a jeweller, and jewellers were not subject to the same restriction. So the likely effect was substitution of channel rather than reduction of demand, which is what the archive records happening across the whole sequence of measures.
There was also a second-order cost. Bank-sold coins were assayed, hallmarked and came with a receipt, so pushing buyers out of that channel moved them toward less documented alternatives. A policy intended to reduce imports also reduced the share of purchases that were traceable, which cut against the transparency objectives the same institutions were pursuing elsewhere.
Where it sits in the sequence
Between January 2012 and August 2013 India raised gold import duty from 2 per cent to 10 per cent in five steps and added an export-linked quota rule. Alongside those, the Reserve Bank restricted gold-backed lending, discouraged bank coin sales, and promoted paper-gold alternatives. The full sequence is set out in India's gold import regime.
The measured outcome was consistent: recorded imports fell, household demand for metal fell much less, and the difference appeared in the landed premium and in seizure statistics at the international airports, the subject of the dispatch on smuggling. The paper-gold push failed for a related reason, covered in the ETF section: a fund unit was made more expensive by the same duty, because the fund had to buy physical metal to create it.
What a measure of this kind actually reaches is the formal channel, and only that. Banks were the easiest point of control and the least important source of the metal, so restricting them moved the same demand to jewellers and to the parallel market without changing its size. That gap between the reach of an instrument and the extent of the behaviour it targets runs through every Indian gold measure in this archive.
Questions about this dispatch
Why would a central bank stop banks selling gold coins?
Because it made the formal financial system an importer of gold on behalf of savers, at a time when the import bill was under political pressure as a driver of the current-account deficit. Closing a regulated distribution channel was administratively simpler than another duty increase.
Did restricting bank coin sales reduce Indian gold demand?
It reduced demand through that channel. Buyers prevented from purchasing at a bank counter could buy from jewellers, who were not covered by the same restriction, so the main effect was substitution of channel. Across the whole sequence of measures, recorded imports fell considerably more than household demand did.
Was there a downside to closing the bank channel?
Yes, and it was documented at the time: bank-sold coins were assayed, hallmarked and receipted, so moving buyers away from them reduced the traceable share of purchases. A measure aimed at the import bill therefore worked against the transparency objectives being pursued in parallel.
This page restores an item first published on 20 March 2013, 14:37 IST at the address below. Cite the publication date rather than the date you read it: the material is a 2011 to 2016 document, and the date is what makes it meaningful.
https://www.bullionstreet.com/news/india-central-bank-may-ban-gold-coin-sales-by-banks/4326