India May Loosen Rules On Bullion Banking
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India May Loosen Rules On Bullion Banking

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India May Loosen Rules On Bullion Banking

India is routinely the world's leading country in terms of annual gold demand. Collectively, the Indian public holds an astounding amount of physical gold—over 20,000 metric tons, by most estimates!

For context, that's more than double the gold reserves of the United States, which is itself more than double the gold reserves of any other central bank in the world.

However, India's domestic gold market remains largely underdeveloped.

Gold Monetization

Going back at least four years, the Indian government under the leadership of current Prime Minister Narendra Modi has introduced a variety of policies known as the "Gold Monetization Scheme," or simply GMS.

The intended purpose of the scheme is to get rural Indian citizens to place their gold into the country's official financial channels. This would allow all that gold to be put to "productive" uses, such as being lent out or used as collateral.

Thus far, the GMS has been mostly unsuccessful. The Indian people are more trusting of a tangible asset rather than a promise on paper from a bank. Owning gold is (quite wisely) seen as the ideal form of saving for the future within India's rural communities, and a family's "gold savings" are traditionally passed down to their children upon marriage in a manner similar to a dowry.

Moreover, everyday commerce in India still hasn't fully recovered from the "Modi Shock" about a year ago, when the prime minister's administration effectively demonetized large-denomination banknotes across the country.

Banking Restrictions Easing?

There are still several structural barriers to a financialized gold market in India. Adoption of ID cards for gold purchases (so they can be subject to taxes) has been low, and the appeal of interest-bearing bank accounts for gold deposits has remained subdued.

Another major obstacle is the fact that Indian banks, whether they are commercial banks or investment banks, have heretofore been barred from dealing directly in bullion. This regulation is no doubt intended to shield the country's official banking sector from the rampant problem of gold smuggling.

A story published this past week in the Indian business press suggests this practice may soon come to an end. Banks would be freed to handle metals trades themselves, such as through a bullion trading desk. Such a policy change is anticipated sometime in the first quarter of 2019.

Not only would the lifting of this restriction create another profit opportunity for India's banks, it would also lead to more efficient price discovery, perhaps impacting the premium on gold in India relative to other global price benchmarks.

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

About the Author

Everett Millman

Everett Millman

Analyst, Commodities and Finance
Managing Editor

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in CoinWeek, Advisor Perspectives, Wealth Management, Activist Post, and has been referenced by the Washington Post.

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