Indian gold monetization scheme takes a hit from RBI new policy

By Paul Ploumis 22 Jun 2015 Last updated at 08:40:47 GMT

MUMBAI (Scrap Monster): The Reserve Bank of India (RBI) has sent a letter to the Indian Finance Ministry raising its opposition to the proposed plan to include gold deposits in Cash Reserve Ratio (CRR). With this, final implementation of the gold monetization scheme by the government is likely to face further delay.

According to the RBI, there are likely chances that banks may hoard excess gold if it is included in CRR. Further, existing RBI guidelines do not allow gold to be used as bank CRR. In its letter to the Finance Ministry, the country’s central bank pointed out that inclusion of gold is feared to weaken the effectiveness of CRR as a monetary policy tool. Gold as CRR would expose its reserves to the risk of commodity price fluctuations. Moreover, unlimited hoarding of gold by banks is against the rules of the financial system.

Experts commenting on the RBI stance noted that the central bank has every right to express its reservations on the proposed gold monetization scheme. According to them, allowing CRR to be held in the form of gold would further weaken its monetary policy mechanism.

The RBI’s policy is not expected to affect retail gold depositors. However, banking regulations and RBI Acts may be amended before the gold monetization scheme for large institutional holders is launched.

According to reports, the government is unlikely to drop its plan. However, it may consider launching of two separate schemes-one for retail customers and the other for institutions. Sources from Finance Ministry indicate that it will soon take up the matter with the central bank. The officials are busy giving final touches to the scheme, which is expected to be launched during July this year.

The proposed gold monetization scheme is aimed to mobilize surplus gold holdings with individuals and institutions into gold deposits.