Central bank moves to break India's golden habit

PHOTO: Central bank moves to break India's golden habit

When 19-year-old Fathima Hussain got married, she was shocked to discover that her father, a well-to-do businessman, had given her only gold-plated jewellery and coins for her wedding.

The Indian bride was so incensed at not getting pure gold gifts that she filed a police complaint against her father a month ago.

"I realised after my wedding that the gold was not pure. My parents are well-off and it was a loss of face for me. My husband didn't want me to file a complaint but I felt it wasn't right," said Ms Fathima about her father E.P. Hussain.

Police say the case, now in civil court, is unusual but it is a reflection of how important gold is culturally in India.

"At the time of marriage, parents usually give gold to their daughters... It is a very important tradition," said Mr Jaleel Thottathil, an inspector at Perinthalmanna police station.

India is the world's biggest consumer and importer of gold.

People believe it is auspicious to buy gold during weddings and festivals, and as an investment to tide over rough financial patches.

But it is exactly this practice that the country's central bank wants to break as it tries to keep a lid on gold imports, which are big enough to widen the country's trade deficit and cause "macroeconomic stress", including on the rupee currency.

The central bank is trying to convince people to look at other investments such as bonds.

Last month, it even banned banks from financing gold purchases.

"Inflation-indexed bonds could also be an option to offer investors returns and detract them from gold investments," said Mr Deepak Mohanty, an executive director of the Reserve Bank of India, in a speech last Friday.

The government early this year increased Customs duties on gold from 2 per cent to 4 per cent to reduce imports that the central bank sees as a major reason for India's gaping current-account deficit, which is the gap between imports and exports.

The gap touched a record high at about 4.9 per cent of gross domestic product in September after going down to 3.9 per cent in June.

India has been the world's biggest gold importer, though this year, China could grab that title.

Last year, India imported US$62 billion (S$75 billion) in gold, up from US$43 billion the year before.

Slow growth and a volatile stock market, experts say, have sent investors heading to gold in the last couple of years.

While high gold prices, a weak rupee and a jewellers' strike have all hurt sales of gold for most of this year, experts say people are just waiting for prices to stabilise.

"During periods when gold prices are less stable, latent demand builds up and that ultimately gets fulfilled once price stability is

re-established," said Mr Amresh Acharya, director of investment at the World Gold Council.

For many Indians, gold - even though prices have climbed to 30,000 rupees (S$662) per 10g - is still seen as the only safe investment.

"I think it is a fantastic investment," said Ms Ritu Sharma, a travel consultant who without fail buys gold jewellery or coins for Deepavali regardless of the price.

"All other investments, such as mutual funds, are not stable but gold prices will only go up."