India's high gold imports are hurting the country's current account deficit. The government's import restrictions are hurting the populace. The only organisation not worried, as of now, are gold backed exchange traded funds.
Worried investors are veering towards the country’s 14 gold exchange traded funds (ETFs), which together have garnered 40,000 kilo of the precious metal.
The ETFs allow investors to trade in the metal in a non physical form and electronically on stock exchanges. Gold ETFs debuted in India about six years ago.
The first gold ETF launched in 2007 by Benchmark Mutual Fund (now Goldman Sachs) was followed by 13 others in quick succession. The 14 mutual fund houses present in this segment are managing gold assets worth nearly $2.2 billion (Rs 120 billion).
In terms of gold weight, Goldman Sachs Gold ETF manages 11,218 kilo, followed by RShares Gold ETF with nearly 9,800 kilo. Kotak Gold ETF and SBI Gold ETS hold about 4,500 kilo each.
Incidentally, comparatively smaller gold ETFs from UTI and HDFC fund houses manage gold weighing less than 3 tonne each.
While one might consider the gold stocked at the ETF a huge cache, it could also prove to be a bane for some. SBI chairman Pratip Chaudhuri was recently quoted by newswire agencies as saying that the bank was unable to profit from the two tonne of gold lying in the gold deposit scheme of the bank, or lend it out.
Recently, the Indian government allowed gold ETFs to deposit part of their gold holdings with banks in an effort to manage the demand for imported gold. The idea was to put the gold corpus of ETFs to productive use.
The SBI chairman, however, is not too hopeful. Gold ETF's have a tax rate of 10%, as compared to bank deposit interest tax rate at 30%. Investors would necessarily go to gold ETFs, rather than invest in bank deposits.
Incidentally, bank finance for purchases of gold bullion has been prohibited, though banks have been allowed to continue their role as nominated agencies in gold imports. The government had also strongly advocated the cause to unlock the value of idle or unproductive gold, which lays in vaults across the country.
The SBI chairman complained that the government was not making it conducive for investors to bring their gold to the bank.
If an investor buys gold from the bank, he cannot return the gold to the bank. This has limited many purchases, since the selling option does not exist with gold bought from banks across the country.
The chairman has suggested that the government ensure a two way opportunity, a buy and sell option, and have investors approach banks either to buy or to park their precious metal.
However, at 40 tonnes, India's total gold ETF holding is only about 10% of the 398 tonne of gold the country imported in the April-October 2012 period.