India's RBI Restricts Lending Against Gold, Gold linked ETFs, Mutual Funds By Rural Banks To Curb Heavy Imports

The Reserve Bank of India's, or RBI, offensive against gold continued Tuesday when it imposed restrictions on the country's regional rural banks, or RRBs, for lending money against gold, in an attempt to discourage demand for the precious metal and reduce its imports.

“It is advised that while granting advance against the security of specially minted gold coins sold by banks, RRBs should ensure that the weight of the coin(s) does not exceed 50 grams per customer,” RBI said in a statement.

The rule also applies to advances against units of gold ETFs and mutual funds, the central bank said. The bank also restricted the loan amount to within the limit approved by a rural bank's board, for loans against gold ornaments, gold jewelry and gold coins weighing up to 50 grams.

The RBI, in recent months, has been hard at work trying to contain the appetite for gold, which is an integral part of India’s culture, lifestyle and festivals, and is traditionally regarded as the safest and easiest investment tool to hedge inflation.

Earlier in the year, the central bank had imposed similar restrictions on commercial banks, and has raised the import duty on gold twice in the last six months. India accounts for 25 percent of the global gold demand, and is struggling to close a yawning current account deficit as the rupee continues to weaken, further bloating the country's gold import bill.

India's trade deficit shot up to $20.14 billion in May, a seven-month high, up from $17.8 billion in April while its current account deficit stood swelled to 6.7 percent of GDP in December 2012, way above the central bank's comfort level of 2.5 per cent. Current account deficit is expected to drop to about 5 percent of GDP in the current financial year.

India imported around 162 tons of gold in May, up from 142.5 tons in April, recording a 138 percent increase in imports made a year earlier, data from Indian finance ministry showed, even as the country's central bank fought to control soaring inflation. And, gold imports were responsible for 30 percent of the current account deficit in 2012, according to RBI figures.