Wednesday, October 30, 2013

"India and gold (1): jewellers in a desperate spot"

Coming into the Diwali holiday a couple timely posts.
From the FT's beyondbrics blog:
What can India do about its gold habit? In the first part of a beyondbrics series, to accompany the FT’s Analysis of India and gold, we look at the impact of recent measures to curb the country’s gold appetite on the jewellery industry.

India’s insatiable appetite for gold has been growing as income levels rise. Imports of the yellow metal have spiraled from 471 tonnes in the 2001 fiscal year to 1,017 tonnes in the year ended this March.
These shipments have been weighing on the nation’s external finances and helped push the economy into its worst financial crisis in over two decades earlier this year. If demand had stayed at 700 tonnes, India’s current account deficit would have been $17bn lower in the last financial year – when it reached an unsustainable $87.8bn or 4.8 per cent of GDP.

This January finance minister, Palaniappan Chidambaram, signalled he was serious about curbing imports of the precious metal and a series of policy measures have followed. Import duties have gradually increased from 4 per cent to 10 per cent and importers are now required to re-export a fifth of their shipments.
These measures have worked in bringing imports down – at least for now. But what impact has this had on India’s jewellery industry?
Gold jewellery plays a big part in India’s culture. It is gifted to the temples to decorate icons, given to a bride on her wedding day – and used as an inconspicuous store for illegitimate wealth.
Half of India’s gold purchases are centred around weddings, according to the World Gold Council, when jewellery is traditionally presented to a bride in her trousseau and to the groom’s family in the form of a dowry....MORE
And a look at the larger problem facing the Indian central bank from the FT's flagship blog, Alphaville:

Hurrah for India’s FX swap strategy, or not?
The Indian government’s efforts to support the rupee seem, for now, to have worked:
In fact, the reversal has been so strong that the Reserve Bank of India, saw fit to roll back some of the emergency measures it put in place in July to support the currency. On Tuesday, the RBI cut its Marginal Standing Facility rate by 25bps to 8.75 per cent, in a bid to ease liquidity in the banking system.

A lot of the turnaround may, of course, be linked to the Federal Reserve’s eventual non-taper. But there is also an argument to be made that some of the RBI’s emergency support policies were more successful than others.

Arvind Subramanian at the Peterson Institute for International Economics provided an interesting analysis earlier this month of which measures worked. Among the most effective, in his opinion, was the government’s relatively original use of FX loans rather than sales.

The success of this contrasted sharply with the RBI’s early attempts to boost the currency by lifting short-term rates, which Subramanian says did little to boost confidence and were poorly designed.
So what was it about FX loans (or swaps) that proved them to be such a useful policy tool?...MORE