Following China's decision to open up the gold sector by allowing more banks to trade in bullion, Indian banks have also decided to approach the Reserve Bank of India for permission to trade in gold.

Several banks have moved the RBI seeking permission to trade in gold in the domestic market and even hedge their requirements on futures exchanges.

At present, banks are allowed to only sell gold; they cannot buy it. Banks import gold for selling to jewellers. They also sell gold coins to retail investors and this has gained popularity. However, when an investor wants to sell the investment in gold coin back to the banks, that is not allowed.

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According to a report in India's Business Standard newspaper, banks get a trivial commission when they import gold to sell to the jewellery sector. Most banks are importing gold on a consignment basis and don't have to take a price risk. Trading on consignment means banks import/buy gold with a condition that unsold gold will be returned to the original seller.

However, the government has allowed some star trading houses and trade bodies to also import gold. Banks argued that the competition to import gold on behalf of jewellers is increasing. So far, other players have not made much headway but they will begin to do so, taking away business from banks. So, banks want flexibility for trading in gold in the domestic physical market and also hedge their positions on futures exchanges.

China last week liberalised gold trading norms, saying it would let more banks import and export bullion and give higher access to foreign companies in gold trading. China said banks will also be permitted to access more bullion investment products. RBI is understood to have said the Banking Regulation Act did not permit banks to trade in commodities, including gold, and the banks' demands can be met only if the Act is amended. Under the present regulations, banks are not allowed to hedge in gold on commodity futures exchanges. However, the Forward Markets Commission has written to the central bank to allow banks to hedge on the futures market.

Banks have also asked for permission to invest in gold exchange traded funds, which would boost the trading of gold in demat and securitised forms. Gold ETFs have been making presentations to banks but so far banks have not been able to invest in these. If banks are allowed to invest in ETFs, it would improve liquidity in such funds.

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