Citizens' Issues
10 injured as train derails in Assam
At least 10 people were injured after a passenger train derailed in Assam on Saturday morning.
 
Northeast Frontier Railway (NFR) officials said five coaches and the engine of the train derailed over a bridge near Salakati station in Kokrajhar district. 
 
The NFR had to cancel at least 10 trains due to the accident. 
 
Long-distance trains have also been affected as their timings have been changed. 
 
The NFR has ordered a probe and top officials have rushed to the spot.

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Nifty, Sensex strong, Bank Nifty weak– Weekly closing report

Nifty will continue to rally as long as it is above 8,400 on a weekly basis
 

The S&P BSE Sensex closed the week that ended on 22nd May at 27,958 (up 634 points or 2.31%), while the NSE’s CNX Nifty closed at 8,459 (up 197 points or 2.38%). We had mentioned that Nifty is struggling to rally and for the uptrend to remain, it will have to stay above 8,150. It made higher lows for the entire week, except on Thursday and managed to stay above 8,150 for the entire week. We expect the uptrend to continue subject to dips.
 
On Monday, the 50-stock Nifty hit its 15-day high and closed near to it. Nifty closed at 8,374 (up 111 points or 1.35%). Data released by the government last Friday showed that India's merchandise exports declined 13.96%, while imports declined 7.48%. The provisional accounts for the year ended 31 March 2015 (2014-15) showed that the fiscal deficit stood at 4% of GDP for 2014-15 as against the target of 4.1%. The Finance Ministry said that the government has managed to better its target for containing the fiscal and revenue deficits in the last financial year. The SBI Monthly Composite Index, a leading indicator for manufacturing activity in the Indian economy, inched up from 46.8 in April 2015 to 53.8 in May 2015.
 
The 50-stock Nifty, the benchmark, was moving higher on Tuesday but at around 2pm, it lost strength and moved in to red. A struggle to revive made the Nifty close marginally lower. Nifty closed at 8,366 (down 8 points or 0.10%). Rating agency Crisil said expectations from the Prime Minister Narendra Modi-led government have moderated in its first year, as it was not able to push demand due to the issues it had inherited.
 
On Wednesday, Nifty moved higher with the RBI governor Raghuram Rajan’s comment that inflation has come down sharply and Chicago Federal Reserve President Charles Evans mentioning in Munich that a hike in US interest rates is not likely to be appropriate until early 2016. Nifty closed at 8,423 (up 58 points or 0.69%).
 
Next day, Nifty recovered and closed marginally lower after trading in the red for most of the session. Nifty closed Thursday at 8,421 (down 2 points or 0.03%). Oil prices moved higher on the US crude stockpiles report.
 
The gap up opening on Friday for Nifty was followed by it moving higher till 1.15pm after which it moved lower. However, the 50-stock index managed to close solidly in the green. Nifty closed the week at 8,459 (up 38 points or 0.45%).
 
The government on Thursday announced that in order to bring clarity on foreign direct investment (FDI) policy rules for overseas Indians, investment by NRIs under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations will now be deemed to be domestic investment at par with the investment made by residents.
 
Out of the 27 main sectors tracked by Moneylife, top five and the bottom five sectors for this week were:
 

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Will the new gold scheme succeed?
Success of the new gold monetisation scheme depends on incentives offered for banks and depositors. Depositors want higher interest rates, while banks want regulatory exemptions. If these are not provided, then it risks being a damp squib, like the one in 1999, says Nomura
 
Presenting the Union Budget, Finance Minister Arun Jaitley had announced gold deposit accounts to utilise the 20,000 tonnes available within the country. On Tuesday, the government put in the public domain the draft guidelines for the interest-bearing gold monetisation, or deposit scheme (GMS). However, according to Nomura, unless there is an incentive for all participants involved, the new GMS could also risk seeing low participation and more clarity will emerge once the final guidelines are out.
 
In a research report, Nomura said, "The jury is still out on this and it depends on the incentives on offer for both the banks and depositors. From a depositor’s perspective, as the gold has to be stored in standardised coins, households are unlikely to deposit their jewellery under these schemes and the target customer (for a bank) would be households or institutions that hold gold as an investment (about one-third of the total gold demand in India)."
 
The objectives of the GM scheme, under which as little as 30 grams can be deposited, is three-fold: Mobilise the gold, give a fillip to the gems and jewellery sector by making gold available from banks on loan and reduce the reliance on imported gold and conserve foreign exchange.
 
"The minimum quantity of gold that a customer can bring in is proposed to be set at 30 grams, so that even small depositors are encouraged. Gold can be in any form, bullion or jewellery," the guidelines, said, adding the depositors can redeem the gold either in cash or in physical form.
 
According to Nomura, the lower ticket size (minimum deposit of 30 grams) and tax exemptions could help attract more depositors and correct some of the faults with the 1999 gold deposit scheme. "However," it said, "interest rates on gold deposits will need to be much higher than those currently offered (0.75-1%) to make it an attractive proposition. However, as small gold deposits would entail much larger transaction costs in terms of handling, storage and transportation charges, banks may not offer attractive interest rates."
 
 
A study by Errol D’Souza shows that if depositors are paid 2-3%, then the total cost of assaying plus other cost for banks would stand at 4.9-6.95% (Figure 2). There may be economies of scale if the banks are able to mobilise large quantities of idle gold held by institutions such as temple trusts in India. However, this would likely be a challenge as temple trusts have historically had very low participation in the existing gold scheme. 
 
Similarly, banks may need an incentive to garner gold deposits as this does not form a part of their core business. If gold deposits are allowed to count as cash reserve ratio or statutory liquidity ratio (CRR/SLR) requirements, then banks could offer higher deposit rates. However, without regulatory exemptions, banks themselves may not be keen on pushing this scheme, Nomura says.
 
Utility of gold deposits for banks
 
One of the challenges of making the gold scheme a success is creating incentives for banks. The government has proposed the following uses of gold deposits:
  1. CRR/SLR: Banks may be permitted to use the gold deposits as part of their cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements.
  2. Foreign Currency: Banks will be allowed to sell gold in exchange for foreign exchange, which can be used to lend to exporters/importers. 
  3. Coins: Banks can use the gold deposits to sell gold coins to their customers.
  4. Exchanges: Banks can buy or sell on domestic commodity exchanges, where their mobilised gold can be delivered.
  5. Lending to jewellers: As discussed above, the gold deposits can be used to lend to jewellers who use the gold as their raw material.
A comparison with the 1999 scheme
This is not the first time a gold deposit scheme has been implemented. In 1999, Indian policymakers introduced a similar scheme, but it turned out to be a damp squib for several reasons, some of which the government has tried to fix.
 
First, the gold deposit scheme of 1999 had no real incentives for depositors. Even though the scheme qualified for tax exemptions (wealth tax, capital gains tax and income tax), interest rates were very low (0.75% for a 3-year deposits and 1% for 4 to 5-year deposits), the ticket size was large (minimum deposit of 500 grams) and the tenure was too long (3-7 years). This made it unattractive for households, resulting in very little gold deposit accretion. In this new proposed GMS, the government has lowered the minimum tenure to 1 year and the minimum deposit to 30 grams. This should make the product accessible to a wider population.
 
Second, the 1999 scheme also lacked an incentive for banks. While banks were exempt from maintaining cash reserve ratios (CRR) on the gold deposits (10% in October 1999), they had to maintain the minimum CRR (3%) and also the statutory liquidity ratio (SLR) of 25%. The 2015 scheme, in contrast, proposes (at the draft stage) that gold deposits be held as part of CRR/SLR requirements.
 
Third, banks’ interest was also muted because they lacked the facilities for melting the jewellery, testing its purity and warehousing it. Plus, banks required pre-approval from the RBI for launching the scheme, making it a cumbersome process for them. Although some of these conditions such as prior approval from the RBI were subsequently relaxed in 2013, the scheme failed to gain traction. Under the 2015 scheme, banks will partner with purity testing centres and refiners to outsource the assaying and storage of gold, reducing the costs for banks. 
 
 
The Turkish example
Nomura also cited the example of Turkey, which was able to increase the country's gold reserves by more than 200 metric tonnes (MT) through similar gold deposit scheme. As in India, Turkish households traditionally invest their savings in gold, particularly because gold is exempt from taxation. 
 
Faced with a bloated current account deficit in 2011, the Turkish central bank introduced a gold scheme in which banks were allowed to substitute part of their reserve requirement liabilities with gold. Banks in Turkey were required to hold 10% of their deposits (CRR equivalent) as cash. 
 
Under the scheme, 30% of these liabilities could be held in gold instead of cash. Consequently, banks promoted various innovative schemes to attract gold deposits, such as gold accounts, which enabled depositors to trade gold, gold structured products and interest bearing gold savings accounts. They recycled the gold from these deposits into gold bars and deposited them with the Turkish central bank. 
 
The scheme not only helped to monetise idle gold in the country, exporters also leveraged on gold loans, driving up jewellery exports from Turkey. To further promote the recycling of gold within the country, bank ATMs were also upgraded to dispense gold. As a result of the scheme, since 2011 banks have increased their gold reserves with the Turkish central bank by more than 200 MT.
 
Macro implications of the Gold Monetisation Scheme
According to Nomura, if the GMS is successful, then it could have several positive implications for the Indian economy:
 
First, it could lower gold imports by bringing into circulation domestically-held idle gold from households and institutions such as temple trusts. According to the World Gold Council’s estimates, Indian households and other institutions own around 22,000 MT of gold. Even if the scheme is able to create only 100 MT in gold deposits over the next few years, it could help reduce the gold import bill by 10% ($3 billion) annually.
 
Second, the increased availability of gold due to this scheme could reduce transaction cost for jewellers and, as in the case of Turkey, end up boosting exports. 
 
Third, it would enable households and temple trusts to monetise their gold assets, on which they currently earn nothing. 
 
And fourth, if banks are allowed to include these deposits in their CRR requirements, it could help release funds for onward lending in the economy. 
 
"Depositors want higher interest rates, while banks want regulatory exemptions. If these are provided, then the scheme may be successful. If not, then it risks being a damp squib, like the one in 1999," Nomura concluded.
 
 
 

For a gold depositor: When a depositor approaches a bank to open a gold savings account, the bank will first test the purity content of the gold being deposited. In a purity
testing centre, a preliminary machine test will be conducted to estimate the amount of pure gold in the jewellery. If the customer does not agree with the result, the jewellery
will be returned to the customer. If the customer gives his consent, the jewellery will be melted and the customer will be given a certificate of gold deposit, attesting the purity and amount of gold deposited. Next, the bank will open a Gold Savings Account for the customer, and credit the amount of gold to the customer’s account. Both the interest and principal payment paid to the customer on this account will be valued in gold (grams).

Storage of gold: The purity testing centre will transfer the gold to refiners who will store the gold bars in warehouses (unless banks prefer to store it themselves). Hence, the GMS involves a tripartite agreement between the bank, the purity testing centre and refiner, detailing the arrangement (service fee, storage costs, etc) between them.


For a gold borrower (jeweller): Since banks now have gold deposits, they can lend the same to jewellers. Jewellers can open a Gold Loan Account with a bank. Once the loan is sanctioned, the jeweller will receive physical gold from the refiner. The repayment by the jeweller will be made in cash.

 
 

 

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COMMENTS

Palak Mishara

2 years ago

Your blog is excellent... very useful for day traders.... keep it Up !!

Ralph Rau

2 years ago

There is an extremely well known precedent in history for confiscation of public gold of course "in the public interest". It happened in the land of free enterprise ! Desperate circumstances call for desperate solutions. Good luck to the present wise leadership.

The United States Gold Reserve Act of January 30, 1934 required that all gold and gold certificates held by the Federal Reserve be surrendered and vested in the sole title of the United States Department of the Treasury.

The Gold Reserve Act outlawed private possession of gold, forcing individuals to sell it to the Treasury, after which it was stored in United States Bullion Depository at Fort Knox and other locations.

The Gold Deposit scheme is doomed to fail in peace times. It will succeed only if the patriotic streak is tapped at the time of war.

REPLY

MG Warrier

In Reply to Ralph Rau 2 years ago

We need to win several wars during 'peace time'. WAR AGAINST POVERTY, WAR AGAINST CORRUPTION, WAR AGAINST INJUSTICE to cite a few examples. Win, we will!
War is the product of greed and insanity. I agree, economies of some developed countries are dependent on sustaining the fear of war elsewhere. But somewhere change has to begin. For such a beginning, this is the right time and India is the right geographical area.

MG Warrier

2 years ago

Read with the comments so far, fairly detailed analysis. This scheme or some other scheme or a combination of schemes and policy initiatives have to succeed in bringing to the mainstream economy of India a substantial portion of the GOLD HOARD, and sure this will happen. Public can, according to media report share their views on the draft scheme at http://www.mygov.in As one who has been relentlessly campaigning through LTTE(Letters To The Editor) and articles published including at this site and The Hindu Business Line(Gold management needs a makeover, April 12/13), I am hopeful of some positive results during the next 2 to 4 years. Now that a beginning has been made from the Government’s side, it is for the stakeholders to come together and make the scheme a success. Viewed independently, every hurdle will be insurmountable. But if there is consensus that at least 2 to 3 per cent of the estimated domestic gold stock should get accounted and made pure and tradable every year, further planning and policy initiatives will not be that difficult.

B. Yerram Raju

2 years ago

60-65 percent of ornamental gold is in the South and most of it in rural and semi-urban areas. Gold jewelry is used as collateral security by the farmers - particularly, the small and marginal and leaseholders who are otherwise denied credit - to secure farm credit. The scheme has to have two windows: one for those who would like to avail it in as-is-where-is form and the other in convertible form either cash or gold bars.
The first scheme should wean away those who are using the safe deposit lockers and those who borrow on the security of jewelry for investment purposes. It is desirable to put in a lock-in period of two years for these type of clients and issue non-convertible gold saas-bahu bonds at a coupon rate of 2% p.a with a maturity period of ten years. Banks that issue these bonds should have enough safe storage systems and should provide for even verification of the ornaments by the clients once in a year at a service charge of 0.50 percent of the bond value. These bonds can be used by the Banks for meeting the CRR and SLR requirements. Here the purity and valuations shall be as if it is a gold loan by the banks themselves and valuation acceptance rate for bond issue purpose shall be no more than 40% of the prevailing market rate.

The second: Convertible Gold Bonds under the GMS. Here, the costs of assaying, melting and hall marking has to be met up front by the Banks and not on reimbursable basis as the draft scheme no provided for. Since only 350 such centres are programmed by the scheme and it takes 5 hours for a customer to get the process completed it would mean that only 700 customers through out the country would be eligible to take the bonds under the option - cash or gold bar/coin at the time of maturity. This ludicrously low figure does not take the scheme anywhere near the objectives of the scheme. There should be 100-150 centers for assaying, melting and hall marking in each notified city for the scheme and in centers like Chennai, Hyderabad, Coimbatore, Visakhapatnam, Vijayavada, Bengaluru, Mysore, etc at least 500 such centers. The charges for such purpose should not eat up the interest cost announced in the scheme. The interest should be attractive enough for the investor - the coupon rate should be 2.5% p.a. The lock-in period should be three years. RBI should prefix the hedging mechanisms to take care of the price volatilities in case of those bond holders who opt for taking the gold back in coins/bars.
It is important that the scheme has to be made successful in the interest of growth. All the Temples and Trusts who get into their Hundis the gold should offload to the Banks through the GMS once in every quarter. For all types of such institutions, the lock-in period could be one year instead of two years for the individuals.
Even if 5000 tons of gold is brought into GMS within six months, it will provide huge resource for long term infrastructure investments.

Much depends on weighing the price and commodity risks of this precious metal and the way the RBI hedges these risks.

SuchindranathAiyerS

2 years ago

Gold Monetization will never work in India. Indian Citizens do not hoard gold only because of traditions and dowry practices but because they do NOT trust government. India continues to be run by the Dalit-Mughal Reservations-Corruption Neta-Babu-Cop-Milard-Crony Kleptocracy which not only takes money from citizens by direct extortion (known euphemistically as corruption) and taxation to fund their profligacy and subvert the resources of the people to their personal pomp, pelf, pleasure, perversions and perpetuation but also by way of unfair confiscatory laws and deficit finance. Printing currency, promissory notes and bonds has reduced the value of the Indian Rupee by a thousand fold since 1947. Narendra G Modi Saheb and Co. are already looking more and more like UPA III, praising India's grotesque and iniquitous, undemocratic, anti-National Constitution and laws, and maintaining the status quo-ante in Governance. No tyrant of India really fools the Indian. Though India has kept them more and more uneducated and defecating in the open over 65 years they will try to preserve their very hard earned wealth residue from the depredations of the Government i.e. Kleptocracy as gold. One 1947 Indian Rupee is worth approximately 20 present day Sterling Pounds while one 1947 Sterling Pound is worth close to 2 lakh present day Indian Rupees. But whatever temple wealth was not plundered by the Moslems was stolen from the Hindus by the British in 1923 and subsequently by the Indian Republic in 1959. If at all temple wealth is used for anything, it is not for the welfare of Hindus but for non Hindus such as Haj pilgrimages, Churches and Dalits.Gold Monetization Scheme: Nehru could better plunder Hinduism and destroy its traditions and culture than the British because he was “trusted”.Narendra Modi might out do Nehru. The wealth of the temples was intended for education, healing, nutrition and welfare of Congregational Caste Hindus until the British took the Temples away in 1923 and this was followed through by the Indian Republic in 1959. Any caste Hindu who pays taxes to India's "secular" Government through Temple Hundis must be as truly foolish as anybody who does not make sincere efforts to avoid taxes and extortion by a Kleptocracy that exists solely for its own pleasure, pomp, pelf, perversions and perpetuation.

T N Parikh

2 years ago

I read that the Bank can use the deposited gold to sell gold coins. This can have an inadvertant circular effect: The gold coin purchaser can redeposit the coins with the bank under the scheme. What I feel is that the gold so obtained in the scheme can be used by the RBI as FOREX asset to gain support for the Indian currency.
T. N. Parikh
[email protected]

Vinod Kumar Agarwal

2 years ago

Sorry the Market Cap in Nov 2014 crossed Rs.100 Trillion amounting to 1660 Billion USD only double of unutilised personal Gold worth 860 Billion USD.

GOT THAT?

Vinod Kumar Agarwal

2 years ago

OH YESSS The BLACK GOLD SCHEME has to succeed. That was the only way forward sooner than later.

Estimated 20000 Tons of Gold belongs to personal wealth of Indians. Valued at Rs.270 Crore per tonne amounts to what Rs. 54 Lakh Crore. (At $43 Million per tonne amounts to $860 Billion USD)

Somebody must compare this with Market Cap of Stock Markets in India.

JUST DO IT.

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