The gold trade in India is all set to evolve in a much more orderly fashion after the Securities and Exchange Board of India approved the framework for setting up gold exchanges in the country.
The move will benefit retail buyers of gold in a big way since exchanges would bring the much-needed transparency and guarantee of purity to the markets across the nation.
This would also enable uniform gold rates in India. Increased investment in gold can also be expected as consumers receive assurance of quality.
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Though mandatory hallmarking is already in place, the exchanges with their safeguards would give consumers much more confidence in the purity of the gold they buy.
In all these countries gold exchanges are cited as responsible for higher retail buying of the yellow metal as well as better price discovery in the retail market.
According to Sebi's framework, the instrument representing gold is to be called 'Electronic Gold Receipt' EGR and would have trading, clearing and settlement features like stocks and securities.
This means investors need not fear any default by traders since each transaction would be guaranteed.
Further, the ease of trade would also improve as the EGR could be traded like shares in dematerialised forms.
Settlement of trade takes maximum a day or two depending on the settlement cycle to be fixed by the regulator.
These positive policies are bound to spur demand for gold, taking the country to the top of the gold consuming nations.
It is important to note that India is now the second largest consumer of gold in the world. Official data shows that every year 800 tonnes to 900 tonnes of gold is imported.
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However, since the country continues to follow the London Bullion Market prices, gold prices remain higher.
The proposed gold exchanges could lead to lower domestic consumption of gold as it would eventually lead to lower prices as the country moves from a price taker' to price setter' in the domestic gold market.
Also, the gold exchange would iron out different prices in various parts of the country. The difference in prices is unfair to the customers since rates are currently fixed internationally for gold.
Secondly, customs duty is also the same. Moreover, GST rates are uniform and are applicable to all states.
Hence the existence of different rates for the same quality of gold in different parts of the country is beyond reason.
Along with bringing transparency, the regulator should also prevent unauthorised manufacturing of jewellery to achieve the underlying objectives of the gold exchanges. Along with these positive steps, gold smuggling must be stopped by lowering customs duty.
Gold has a profound impact on the value of world currencies. It is a truism that one of the reasons for the USD to remain internationally powerful is the huge gold reserves that the US Government enjoys.
If the Indian government can chalk out a scheme to utilise the unproductive gold stock to the advantage of household investors as well as the nation, it would do good for the Indian currency.
According to the World Gold Council, household gold stocks in India stand at over 25,000 tonnes, while the Reserve Bank of India accounts for much lower.
As the steps to set up the gold exchanges fructify, gold in India would get its rightful moments in the sun sooner than later.