Gold accumulation plan (GAP) is aimed at encouraging households to shift from physical investment in gold into financial assets.
The Finance Ministry has sounded out the Reserve Bank of India (RBI) and commercial banks on the possibility of introducing a gold accumulation plan (GAP). The GAP is likely to be pitched as an alternative to direct investment in the yellow metal by gold-obsessed Indian consumers.
A Finance Ministry committee on 'Deepening India's household financial savings' has suggested the introduction of GAP by banks.
GAP is aimed at encouraging households to shift from physical investment in gold, perceived as a dead investment by policy-makers, into financial assets.
As in a recurring deposit scheme, under GAP, investors sign a contract with a bank to invest a fixed sum every month to buy gold. The bank will pool funds from all GAP accounts to buy gold in the futures market. This move will not immediately add to the physical demand for gold. Hence, it could pass muster with the RBI, say bankers. The metal accumulates in the customer's GAP account and can either be sold later or redeemed in the form of coins or bars.
A gold futures contract is a legally binding agreement for delivery of gold in the future at an agreed upon price.
Futures contracts are used by hedgers to manage their price risk on an expected purchase or sale of physical gold. Speculators use the contracts to participate in the markets without any physical backing.
Due to high imports of oil and gold, India's current account deficit (CAD) soared to a historical high of 4.2 per cent of GDP in 2011-12. A CAD results when a country's total imports of goods, services and transfers exceed exports.
Curbing imports
To curb gold imports, the Government has raised the Customs duty.
The RBI has tightened prudential norms for gold loan by non-banking finance companies, whereby they cannot lend beyond 60 per cent of the value of the pledged jewellery.
Given the average household's yen for gold, deeply rooted in the country's culture, an accumulation plan may hold the answer to policy-makers' concerns on physical import of gold.
Best Regards
Prakash Nair
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