IAIN MARLOW
RTGAM



In a surprise move, India has loosened harsh restrictions on gold imports that were originally designed to deflate a ballooning current account deficit but also angered the country's jewellery industry and led to an increase in gold smuggling.

On Friday, the Reserve Bank of India (RBI) said in a brief statement it was lifting a new rule requiring importers to re-export at least 20 per cent of the gold they brought into India - which is the world's second biggest importer of gold after China. The change was seen as a possible sign India's government was less concerned about imports pushing up its current account deficit.

The move came as a surprise to an industry that had largely expected the restrictions to remain in place, or get even tighter after gold imports surged ahead of this year's wedding season - reaching nearly 183 tons in the third quarter, according to the World Gold Council. India's steep gold-import duty of 10 per cent, which was one of the reasons for the rise of smuggling, will remain in place.

"People were talking about more controls," says Arvind Vijh, the Toronto-based director of Deloitte's India services group. "It has surprised the markets."

The strict measures - in a country whose people have an insatiable appetite for giving gold at weddings and hoarding it instead of of using bank accounts - were enacted in 2013 in the middle of a currency crisis that swept through India and other emerging markets. At the time, India's current account deficit surged to 5.5 per cent of gross domestic product, and was a major factor behind the rupee's 25-per-cent slide against the U.S. dollar. Last year, emerging market currencies fell steeply across several countries - such as Indonesia and Turkey - as the U.S. Federal Reserve signalled that it would claw back its bond-buying stimulus.

Since then, notes economist Shilan Shah of the British research firm Capital Economics, the current account deficit has narrowed to just 1 per cent. Since oil and gold together account for roughly 45 per cent of India's imports, gold's long fall from highs around $1,800 (U.S.) an ounce and the recent plunge in oil prices have eased the pressure on India's import bill. This has given Prime Minister Narendra Modi's right-leaning government more leeway to change the import restrictions, which were unpopular among India's jewellers. The RBI made clear in its statement that it was the government's decision to lift the restrictions.

The move may "signal that officials are increasingly relaxed about India's current account vulnerabilities after the turmoil of last year," says Mr. Shah. "Even if India's gold import demand now picks up, the threat of the current account deficit ballooning to previous levels is slim."

The high duties had led to a surge in gold smuggling: The amount of illegal gold imports seized by authorities jumped 534 per cent in 2013 to 1,267 kilograms, up from only 201 kilograms in 2012. One creative smuggler stuffed gold bars into two lunchboxes and hid them in the bathroom on a Jet Airways flight from Dubai to Mumbai.

With only a brief statement from the RBI released late on Friday in Mumbai, analysts such as Mr. Shah were not quite sure whether restrictions will continue to ease or whether they will be replaced by a new system.