Even as the Indian capital outflows and current account exodus may be threatening to shut down the economy altogether (except for the three oil companies that received a last ditch USD infusion from the RBI yesterday), the central bank is planning and strategizing. And it appears to have come up with more of precisely the same that has led it to its current unprecedented predicament: prevent the population from converting their wealth into hard money, i.e., gold. But while the government's attempts to impose capital controls on gold purchases have been well documented, the latest foray is just a headspinner. Reuters reports [13]that India is now considering a "radical plan to direct commercial banks to buy gold from ordinary citizens and divert it to precious metal refiners in an attempt to curb imports and take some heat off the plunging currency."
Here we can safely assume that the commercial banks will pay for the gold in... Rupees which just hit an all time low?
And not just any rupees but rupees just fresh off the central bank's printer.
Ok, here's a hint: the "ordinary citizens" are not stocking up on gold so they can (profitably) sell it to the banks, the government, the BIS, to China, or to the JPM NY vault - they are doing so because they want to preserve their purchasing power. So what is the government's proposal? Why let's give people worthless pieces of paper for the asset that just hit a record high in rupees.
Truly a Swiss watch plan only a central-planner could come up with. That is, of course, unless the "purchase" is enforced and made obligatory, maybe with the moral support of the local army? In other words, a confiscation. And no, it wouldn't be the first time a broke government has confiscated the gold of its citizens to perpetuate a Keynesian lie [14].
Anyway, back to the story:
A pilot project will be launched soon, a source familiar with the Reserve Bank of India (RBI) plans told Reuters. India has the world's third-largest current account deficit, which is approaching nearly $90 billion, driven in a large part by appetite for gold imports in the world's biggest consumer of the metal.
With 31,000 tonnes of commercially available gold in the country - worth $1.4 trillion at current prices - diverting even a fraction of that to refiners would sate domestic demand for the metal. India imported 860 tonnes of gold in 2012.
"We will start a pilot project among some banks where we will allow them to buy back gold from individual households," the source, an official familiar with the central bank's gold policymaking, said. "This will start soon, we have discussed (it) with banks."
The RBI will ask the banks to buy back jewelry, bars and coins for rupees. Lenders will have to offer better rates than pawn shops and jewelers to lure sellers.
Any talk of using the country's gold to help meet India's international obligations revives memories of a 1991 balance of payments crisis - when India flew 67 tonnes of gold to Europe as collateral for a loan to avoid a sovereign debt default.
Of course, when this plan crashes and burns, the only option for India will be the one we discussed previously [15]: to lease out the nation's hundreds of tons of gold to the BIS. That, or worse: selling it.
Earlier on Thursday, India's Trade Minister Anand Sharma said the central bank should look into the possibility of monetizing gold holdings.
It was not immediately clear whether Sharma was referring to the 557.7 tonnes of gold the RBI holds in its own reserves, or gold in private hands. He did not give more details of how the proposal would work.
"I have not said there should be any mortgaging of the gold, or auction of the gold, that is incorrect. I have just said the RBI should look into ... how they can benefit the people, particularly with regard to the bonds or the monetization," Sharma said in response to a question in parliament.
Earlier this week in comments reported in the national media, Sharma said "even if 500 tonnes is monetized at today's value it takes care of your CAD", or current account deficit.
Selling gold reserves may sit badly with Indians, many of whom saw the 1991 sale as a public humiliation. The secret operation was only exposed after a vehicle carrying the first consignment of bullion broke down on its way to the airport from the central bank.
"It (pledging gold) will be a desperate measure, and it will send a very wrong signal to the entire country because all the time we've maintained that things are under control even though things are adverse," said Madan Sabnavis, chief economist at CARE Ratings in Mumbai.
Such a sale would also dent international gold prices which took a hit earlier this year after Cyprus said it was considering selling its gold reserves to shore up its finances.
So let's see: dumping India's gold kicks the can on the Indian economic collapse and current account , if only for a few months, and kills the price of gold again. Why, this is a slam dunk plan as far as the internal brotherhood of banksters is concerned. Which is why it will happen sooner or later. As for the popular outcry against this move, why cares? It is not as if the popular opinions matter when bankers make decision.
And it will happen: it is only a matter of time. But once it does, everyone will be shocked, shocked that the government is dumping said gold. Just like everyone was shocked that the rupee imploded in the past month despite the extensively documented signs which we reported yesterday [16]. The full list:
- Jan 21 - The government raises the gold import duty by 2% to 6%.
- Jan 22 - The government more than doubles the duty on raw gold to 5%.
- Jan 30 - Finance Minister P. Chidambaram says there are no plans for additional taxes or curbs on gold imports.
- Feb 1 - The Reserve Bank of India (RBI) plans to introduce three or four gold-linked products in the next few months.
- Feb 6 - The RBI says it would consider imposing value and quantity restrictions on gold imports by banks.
- Feb 14 - The central bank relaxes rules on gold deposit schemes offered by banks by allowing lenders to offer the products with shorter maturities.
- Feb 20 - The Trade Ministry recommends suspending cheaper gold jewellery imports from Thailand.
- Feb 28 - India keeps its gold import duty unchanged in its annual national budget, defying industry expectations.
- Feb 28 - India proposes a transaction tax of 0.01% on nonagricultural futures contracts, including for precious metals.
- March 1 - The Finance Minister appeals to people not to buy so much gold.
- March 18 - The Reserve Bank of India says it is examining banks that sell gold coins and wealth management products to identify "systemic issues", with a view to closing any legal loopholes.
- April 2 - The Finance Ministry suggests it is unlikely to raise the import tax on gold further to avoid smuggling and would instead introduce inflation-indexed instruments.
- May 3 - The RBI restricts the import of gold on a consignment basis by banks.
- June 3 - The Finance Minister says India cannot afford high levels of gold imports and may review its import policy.
- June 5 - India hikes the gold import duty by a third, to 8%.
- June 21 - Reliance Capital halts gold sales and investments in its gold-backed funds.
- June 24 - India's biggest jewellers' association asks members to stop selling gold bars and coins, about 35% of their business.
- July 10 - India's jewellers announce they might continue a voluntary ban on sales of gold coins and bars for six months.
- July 22 - The RBI moves to tighten gold imports again, making them dependent on export volumes, but offers relief to domestic sellers by lifting restrictions on credit deals.
- July 31 - India hopes to contain gold imports well below the 845 tonnes that were shipped last year, the Finance Minister says.
- Aug 13 - India hikes the import duty on gold for a third time in 2013, to 10%. Duties for silver and platinum are also increased to 10%. The customs duty on gold ore bars, ore, and concentrate are increased to 8% from 6%.
- Aug 14 - India turns the screws on gold buying again, banning imports of coins and medallions and making domestic buyers pay cash.