Gold demand is likely to come down, says Rangarajan

Gold demand is likely to fall as easing of general inflation rate will make investment in financial products more attractive than the yellow metal, PMEAC Chairman C Rangarajan said on Wednesday.

Also, the steps being taken to curb gold demand are expected to bring down the current account deficit by 0.4-0.5 per cent of GDP in the current fiscal, he said.

"Some action has been taken by RBI in terms of controlling gold demand. To supplement these actions, as inflation comes down and returns on financial products become more attractive, it will be possible to contain gold demand," Rangarajan said on the sidelines of gold summit organised by Assocham.

The Prime Minister's Economic Advisory Council Chief further said that 'inflation is showing signs of coming down and therefore attraction of financial products will be greater'.

The overall inflation came down to over three year low to 4.89 per cent in April.

Expressing concern about higher gold imports in April, he said: "The imperative to contain gold import has become urgent.

"The recent surge in gold demand is however creating some distortions and need to be rolled back to boost growth by reversing the trend of declining financial savings and keeping CAD within prudent limit by contain gold demand."

As a first step, gold demand in India -- the world's largest consumer -- needs to brought down from the current level of 1,000 tonnes per year to 700 tonnes, which prevailed few years ago, he said.

Stating that taming inflation and enhancing the real rate of return on financial products are best ways to contain gold demand, Rangarajan suggested that the government must act on ensuring financial products from bank deposits to mutual funds give adequate returns so that investors shift to these products from gold.

Gold-related schemes and inflation indexed bonds are also being presently contemplated as strong substitute to gold so as to reduce physical holding of the yellow metal, he added.

Asked if more curbs will be imposed in the coming days, Rangarajan said: "The approach of the government and RBI have been very cautious. . . .Some fiscal and administrative actions such as the increase of import duty can be, and recently have been, taken to dampen demand."

The country's CAD has widened due to increased gold imports, which rose to 1017 tonnes in 2012-13 from 471 tonnes in 2000-01. Gold imports during last year accounted 72 per cent of the CAD.

Image: C Rangarajan