Gold Bonds: A solution to the increasing CAD?

A free fall in the valuation of rupee made people to search for the reasons. There are many reasons, related to international market GDP, unemployment rate, Inventory data of commodities etc., out of which one of the prominent reason related to domestic market is widening gap of current account deficit (CAD), CAD is the difference between export and import value of Goods and services. In simple terms, export/import of a country is carried over in US dollar currency when import value of goods is more than export value, then the country needs to go to currency market to purchase dollars to settle the payments for imports. This imbalance in trade creates downward pressure on rupee and the buying capacity of rupee decreases against dollar.

Current account deficit is increasing and major import items contributing this imbalance are crude oil, gold and fertilizer. Crude & fertilizers is an essential commodity and reduction in import bill has an adverse effect to the economy. Now we are only left with strategy to alter the consumption of gold, and biggest question is will the govt succeed in controlling gold consumption?

In India buying gold is a tradition since centuries, in past decade gold has also became one of the favorite avenues for investment. Buying coins & bars outpaced the quantity of jewelry consumption. Most of this gold coin & bar investment made from undeclared money and which is the cause of concern now.

It is estimated officially that total stock of gold in india is around 25000 to 30000 MT. Value of this gold at present rate is somewhere around $ 1.25 trillion. Over the past few months we have seen govt introducing measures to restrict gold import. But, the restriction is not yielding any quick result as there is huge demand for gold in local market, illegal transportation is increasing. In such scenario, govt should introduce gold bonds and suck away the extra gold liquidity available in the market.

Leading fund manager Sadip Sabharwal  & commerce minister anand sharma are showing interest to introduce gold bonds. As the name suggest gold bond will be issued against gold deposited by the public. Actually means govt will buy away gold from public and issue a zero coupon bond with a yield of 4% for a period of 10 year. This will enable the public to convert their black money into white and allowing them to earn a tax free interest. On the other hand govt should transfer the gold to RBI and convert it to foreign exchange or RBI can resell the gold to open market and reduce dependency on import of gold. Out of the 25000 MT, if we can procure 500 MT out of this scheme it will have greater impact on the current account deficit and ensures better control on currency valuation.

NSEL Crisis - State of self regulation

Everyone thinks Indian financial markets are recovering from its mistrust, noncompliance & irregularities. But, the crisis of NSEL gloomed over us again reminding that nothing has changed. While swapping news channels you must have seen the outburst on the fall of share price of FT & MCX. Wondering what is the issue?

Financial Technologies is a technology company founded by Mr.Jignesh Shah around 18 years back. Along with software development, he recently entered into exchange business. MCX & NSEL were the two exchanges dealing in futures market & spot market of commodities respectively. Business was routine till the suspension of forward contracts in NSEL. After which we saw panic selling in FT & MCX, which are the two group companies listed on exchange.

NSEL does forward trading in commodities in which investors buy positions and further sell them to another investor without physically exchanging the commodity. Problem started with brokers “misselling” the forward contracts by mocking 100% risk free return. Current liquidity crisis is due to the imbalance between buy & sell positions. NSEL was allowed to offer only T+1 settlement contracts, but they have also created T+25 settlement contacts. It means buyer is a lender who pays money in two days and expects to receive the cash after 25 days with a risk free return on capital of say 15%, but the sell side transaction which is settled on T+25 is not being honored by the buyer of the other leg of the  contact. Even if one wants to settle this imbalance by selling physical goods, there is no talk about providing delivery of physical stock from exchange. Though company claims physical stock is available at their warehouse, market does not believe their argument.With all these uncertainties, there is a loss of trading interest. This has led to further trade in-equilibrium. Under these circumstances, FT claims it will defer all payments by 15 days and suspended all forward contracts trading except eGold, eSilver & ePlatinum. Company says, it will overcome issues related to settlement as they have assets worth of Rs.6500 cr against the payment due of Rs.5500 cr. But, the stock market is not buying this argument.

If NSEL has done business on virtual stock in their warehouses, it raises serious concern on the trust in financial market. Requires thorough investigation of the matter and guilty should be sent to jail, even if they are rich & powerful. If no action initiated, how can we instill trust in financial market?