India gold rush saps weak rupee -analyst
04:30 p.m Jan 22, 1998 Eastern
BOMBAY, Jan 22 (Reuters) - India's mad rush for gold, which drove consumption up 45 percent to 737 tonnes last year, has undermined an already weak rupee and put the country's foreign exchange reserves under strain, a currency analyst said on Thursday.
''Unless this mad rush for gold is curtailed or restrained, it could put severe pressure on the already dwindling foreign exchange reserves of our nation,'' Jagat Shah, director of the independent Global Link consultants, said in a statement.
Analysts say the bulk of India's gold purchases, which jumped 45 percent in calendar 1997 to 737 tonnes according to a survey by the World Gold Council (WGC), goes into jewellery, given and used every year at an estimated 10 million weddings.
Official imports of gold in India, the world's largest consumer of the precious metal, rose 88 percent in 1997 to 526.45 tonnes, Shah said.
These immense purchases of gold had put pressure on the rupee, said the analyst, who is based in Ahmedabad, the commercial capital of the western state of Gujarat and a major gold trading centre.
Shah noted 170 tonnes of gold were imported between November 1997 and January 15. At an average rate of $300 per ounce, this worked out to an expenditure of $1.6 billion, he said.
''The pressure exerted on the dollar/rupee parity during this same period is a glaring example,'' Shah said.
From 36.20 to the dollar on October 22, the rupee slipped to 37.50 on November 22, declining still further to 39.20 by December 22 and touching 40.30 on January 16, he added.
The Reserve Bank of India has intervened heavily in currency markets during the past few months and its foreign exchange reserves have fallen almost $3 billion since the end of October to $27.04 billion on January 9.
Foreign currency flows into India have dried up in the wake of the Southeast Asian financial crisis.
Investors are also waiting to see who will win India's general election, which will run from February 16 to March 7, before committing funds to the country.
Shah said the government's policy of liberalising bullion imports had compounded with that pressure to weaken the rupee.
India has recently boosted the amount of the precious metal that returning expatriates may carry into the country.
In October, it authorised eight banks to import gold for sale in the domestic markets in addition to the three state-run agencies already charged with this task.
''A large chunk of the imports made in 1996 was met through the NRI (expatriate) route, which had no bearing on the foreign exchange reserves of the country,'' Shah added.
''On the contrary, the old policy of collecting the duty on these imports in foreign currency was the source of a veritable inflow of hard currency for the country, which would have been to the tune of $300 million, as per WGC estimates,'' he said.
Shah advised a policy of restricted gold imports to help solve the problem.
India's obsession with gold has endured despite the metal's woeful performance as an investment asset.
''International prices are crashing, which could cause severe losses to the investment made by the rural population of the country,'' he added.
International gold prices are currently at their lowest levels for two years, but earlier this month hit their lowest in almost two decades.
Traditional gold purchases during the wedding season and the Moslem holy month of Ramadan have saved the market from weakening further, dealers said.
''Because of the general depression in the stock market and a fall in the real estate prices, all the investible surplus of the Indian public, especially those from the rural areas, are being channelled into the purchase of gold which, for all practical purposes, is considered to be a dead investment,'' Shah said.
''Naive investors could be educated about the pitfalls of investing in gold through mass media,'' he said, adding that governments in Korea, Thailand and Malaysia had begun buying gold from the public to swap it for hard currency and bolster dwindling foreign exchange reserves. |
