Fintotal News Analysis | No More Bank Loans for Gold- RBI
No More Bank Loans for Gold- RBI
Ruby Jacob, 20 Nov 2012

20 November 2012

The Reserve Bank of India has directed a blanket ban on bank lending for purchase of gold in any form. In a circular issued yesterday RBI notified all banks to stop lending to retail customers and traders for the purpose of buying gold except for working capital requirements of jewelers.

It has prohibited banks from giving advances for gold or against gold bullion if such advance is likely to finance gold buying. The ban applies to loans for buying gold in all forms including gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold Mutual Funds. This is following last month's Monetary Policy Review in which RBI had proposed not to permit banks to lend for gold buying except for working capital requirements.

India is back on top as the world's largest consumer and importer of gold after slipping away to China for a few months in the last year. 80% of India's gold requirements are fulfilled through imports. Rising gold imports is a big concern to the government and the RBI since they have played a huge role in pushing the country's trade balances to an unfavourable position.

Gold price in India has seen a surge in the last 3 years. Many have rushed to buy it speculating further price rise. However it should be remembered that there is immense risk in increasing the weight of gold in your investment above 10-12% levels. Gold outshines when the other mainstream assets like equity, debt are doing poorly but it normalizes as the economy picks up and its long term returns fall below them. If you check returns of gold in the long term, say 10 years, you'd find it stays just a little above inflation rate.

So don't think gold for a while now.

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