India in Serious Trouble (and Gold at the Heart of It)

Last week India's trade minister, Anand Sharma, came out with a laughable suggestion: RBI should consider monetizing gold.

India’s central bank should look into the possibility of monetizing gold holdings, trade minister Anand Sharma said on Thursday, in the latest proposal aimed at combating a yawning current account deficit that has hammered the rupee.

It was not immediately clear whether Sharma was referring to the 557.7 tonnes of gold the Reserve Bank of India (RBI) holds in its own reserves, or gold in private hands. He did not give more details of how the proposal would work.

India has the world’s third largest current account deficit (CAD), which is approaching nearly $90 billion, driven in large part by a huge appetite for gold imports. The deficit has helped undermine the rupee, the worst performing major currency since May.

Any talk of using the country’s gold to help meet India’s international obligations revives memories of a 1991 balance of payments crisis—when India flew 47 tonnes of gold to Europe as collateral to avoid a sovereign debt default.

In comments published by The Hindu newspaper last week, David Gornall, chairman of the London Bullion Market Association, said India could raise $23 billion by swapping gold for a payable currency for a period of its choice, while remaining the long-term holder of the gold.

Free Money?

I am not sure which is sillier 1) proposing selling gold or 2) Proposing India could get $23 billion in free money by swapping gold while retaining ownership.

India Might Buy Gold From Citizens to Ease Rupee Crisis

Reuters picked up on this story in an equally convoluted report India Might Buy Gold From Citizens to Ease Rupee Crisis

India is considering a radical plan to direct commercial banks to buy gold from ordinary citizens and divert it to precious metal refiners in an attempt to curb imports and take some heat off the plunging currency.

A pilot project will be launched soon, a source familiar with the Reserve Bank of India's (RBI) plan told Reuters, although the idea was met with some scepticism.

India has the world's third-largest current account deficit, which is approaching nearly $90 billion, driven in a large part by appetite for gold imports in the world's biggest consumer of the metal. That has played a major role in driving the rupee to a record low.

"We will start a pilot project among some banks where we will allow them to buy back gold from individual households," the source, an official familiar with the central bank's plan, said. "This will start soon, we have discussed (it) with banks."

Radical Plan With Scant Details

Somehow India wants to buy gold from citizens, and it also wants to sell it (or sell gold bonds supposedly backed by gold). Details are scarce but it safe to conclude that the scheme is preposterous no matter what it is.

Pater Tenebrarum at the Acting Man blog pinged me with this comment "The Indian government is instituting one stop-gap measure after another. Buying gold from its citizens? For rupees? Don't make me laugh...Indians buy gold to get out of the rupee"

Stop-Gap Measures

In his post covering Stop-Gap Measures by India's Government, Tenebrarum stated ...

It also seems likely to us that some traders are worrying that India's government might do something stupid about its gold reserves or the gold held by its citizens. This worry is definitely justified, as India's government has so far done nothing but institute stop-gap measures to halt the slide of the rupee and the deterioration of the country's current account. Not a single step has been taken that would actually be required: bold reform is needed, but it is politically unpopular. And so the government takes one useless emergency measure after another – and it is definitely eying gold as the next vehicle to do something stupid with.

Should India try something with gold, it is perfectly safe to conclude no matter what the plan is, the plan will fail.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com