IGPC proposes gold savings product that defers dollar outflow

Indian Gold Policy Centre has proposed a gold savings product that enables the customer to enjoy the benefit of gold price movement without paying the import duties and GST. The product would also help the government lower the import of physical gold or defer the dollar outflow. 

Modelled after the gold-linked account proposed by former RBI deputy governor Subir Gokarn in 2012, ‘Gold savings product deferring dollar outflow’ intends to link the domestic bank selling the product with an international bank to invest the money in gold forward contracts abroad. While the gold-linked account proposed to keep the physical gold backing the investment in overseas vaults, IGPC wants to put the funds into economic activity.

According to Sudheesh Nambiath, Head India Gold Policy Centre at IIM- A, the product has been submitted to the government for approval. The product can be run by any domestic bank which will tie up with an international bank to invest the money in forward contracts abroad.

The bank will credit the full price of gold into the gold account of the customer on buying the product. The price of gold will be 2.5 per cent higher than the prevailing market price due to the forward premium. However, the price will be 13 per cent lower than the domestic rate as he does not have to pay the customs duty and GST.

Domestic bank will simultaneously cover USDINR for the period and book Gold Forwards by paying 2.5 per cent of the value on the value date. At the time of expiry investor can redeem it in cash or physical metal or transfer the ounces to a jeweler, who is empanelled by banks for purchase of jewellery or can even roll it forward. Redemption will be at the prevailing rate on date of application to redeem. He will have to pay the GST and customs duty only if wants to redeem gold in physical form.

According to Nambiath, the price risk and dollar risk hedging cost borne by the bank will be almost the same or lesser than the overnight call money rate, MCLR and one-year fixed deposit rate. Banks also get to deploy the fund for higher rates, which ensures that investment is used for economic activity.

The dollar outflow is limited to cost of hedging until customer redeems it for converting to jewellery. The product postpones physical flow of gold for a year, and, thereby, outflow of foreign exchange, but creates more liquidity in the system based on the gold. Not all the investors would redeem in the physical form as the returns would be higher otherwise. Hence this also lower the import of gold.