India Central Bank Bans Banks From Giving Loans to Buy Gold .

MUMBAI--India's central bank has banned banks from issuing loans for gold purchases, a move analysts see as a crackdown on the metal's heavy imports that have added to the country's current-account deficit.

The Reserve Bank of India, in a formal notification on its website late Monday, said it has asked banks not to give loans for the purchase of physical gold such as jewelry, coins and bars as well units of gold exchange-traded funds and gold mutual funds.

Banks, however, are allowed to provide "finance for genuine working-capital requirements of jewelers," said the notification that followed a directive in the RBI's Oct. 30 monetary-policy statement.


An RBI spokeswoman wasn't immediately available for comment on the reason for the ban.

Indians have traditionally been huge buyers of physical gold, mainly for jewelry, making India among the largest gold-importing countries. In 2011, India imported a record 969 metric tons of gold, up from 958 tons in 2010.

Gold imports, after oil, are the key reason for India's yawning current-account deficit. The gap, as a proportion of gross domestic product, was 3.9% in the April-June period, outside the RBI's comfort zone of 2%-3%.

The central bank's move isn't the first instance of Indian policymakers trying to discourage gold purchases. In March, the government had doubled the import duty on gold to 4%.

Vaibhav Agrawal, an analyst at Mumbai-based Angel Broking Ltd., said the central bank's move is a prudential measure to guard against further worsening in the current-account deficit.

"Gold prices are not just going up because of global demand-supply dynamics. To a large extent India itself is driving up gold prices," Mr. Agrawal said.

In recent years, gold prices have risen sharply as individuals turned to the yellow metal as an investment and hedge against inflation, considering it a safer bet during times of uncertainty.

At a special festival trading session on Nov. 11, Indian investors bought 22.32 billion rupees ($407 million) worth of gold ETFs on expectations that prices will rise due to lingering concerns over Europe's debt crisis and the looming U.S. fiscal cliff.

Source : online.wsj.com