Gold savings accounts likely to check widening current account deficit

The government may announce gold savings accounts in the upcoming Budget as a means to discourage the purchase of the metal in its physical form, as it seeks to put a check on widening current account deficit, banking and trade sources said.

The government is trying to put in place a national gold policy that can efficiently connect all stakeholders of the gold value chain and help in creating a robust gold ecosystem in the country. If the gold savings account is introduced it will be a step towards it.

Customers can open such gold accounts in banks and put in money on a regular basis, the sources said. They can withdraw the deposit at the prevailing gold price at any time, they said. This is expected to reduce the demand for physical gold as an investment.

It is likely that the gold savings will also get interest, just like the sovereign gold bond (SGB). The yearly interest on SGB is 2.5%.

Sources also indicate that there may be an option of accumulation of gold in the gold savings account. The entry in the gold savings account passbook will be made in terms of the amount of gold for which deposits are made.

At the time of withdrawal, banks will make debit entries in passbook in terms of the amount of gold that is withdrawn either in gold or in cash equivalent to the price of at least 1 gm of gold or in multiple of 1 gm of gold at the prevailing rate on the date of withdrawl.

The government may also come up with a regulatory framework for digital gold.

India, the second largest consumer of gold in the world, meets most of its annual requirement of 800-850 tonnes through imports.

India’s gold imports, which has a bearing on the country’s current account deficit, more than doubled to $38 billion during April-December this fiscal year. The current account deficit was $ 9.6 billion in the quarter ended September 30, 2021.

Banking circles say that the matter has been discussed with the government. The government is keen to make the gold market more organised and develop the precious metal as an asset class, which suggests the commodity will no longer be seen as an “undisclosed treasure” but as an investment product.

“The Reserve Bank of India can regulate these gold savings accounts and can ask the banks to hedge against gold. If this happens, then it will be a good thing for the gold trade. We have seen how well the SGB has been accepted in the Indian market. The government will also look at strengthening the digital gold transactions,” said Shekhar Bhandari, president and business head of global transactions at Kotak Mahindra Bank.

Unlike the SGB, where the bonds are issued in tranches and remain open for a few days for subscription, the gold savings account will allow the investor to make a deposit at any time. However, the government may fix upper and lower limits for deposits.

The government may fix the minimum deposit equivalent to the price of 1 gm of gold, the people ET spoke to said. Higher deposits will likely be in multiples of 1 gm.

The gold savings account will also enable rural India to become a part of the organised and formal gold trade.

Surendra Mehta, national secretary of the India Bullion & Jewellers Association (IBJA), said it needs to be seen how the government fixes the daily gold price. In India, gold prices vary from city to city depending on the transport cost and the rates decided by local jewellery associations.

“In the case of SGB, the Reserve Bank of India takes the rate fixed by the IBJA,” Mehta added.

The government has already taken steps to formalise the country’s gold business by introducing Gold Monetisation Scheme, Sovereign Gold Bond, mandatory hallmarking and introduction of HUID (Hallmark Unique Identification) number for each piece of jewellery.

Courtesy: Economic Times