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.