Errant Indian Diamond Exporters To Face The Heat.

In a move meant to curtail fake diamond exports and the round tripping of funds and diamonds indulged in by some nefarious diamond merchants, India's central bank, the Reserve Bank of India, has reduced the term of letters of credit for the import of diamonds into the country.

An immediate consequence of reducing the term, to 90 days instead of one year, will ensure that diamond importers cannot earn interest arbitrage on their packages. Diamond importers get an interest arbitrage from the local bank by selling off their cut and polished diamonds at a certain value and earn 7% interest on the fixed deposit. All of this has now come to an end.

India's gems and jewellery exports which jumped 47% from March 2010 to March 2011, due to higher prices and improved demand especially from the United States, is now set to get a rude wake-up call.

Traders have pointed out that the significant rise in exports was due to the price increase in raw materials. Gold and silver prices have gone up by 28% and 133% respectively over the last one year.

They added that the price of precious stones, too, had shot up and was higher by 25% to 40% over the past 12 months.

Then the central bank got into the act. Keeping in mind the large representations to the ministry of commerce and the RBI for reducing the letters of credit in order to discourage certain elements who had taken undue advantage of cheap bank loans and interest arbitrage, the bank clamped down on errant traders.

While the move will deal a body blow to these operators, who have been using trade credit, it will automatically put a stop to interest rate arbitrage by some traders and also completely curtail the round tripping of funds, traders said.

Sanjay Kothari, vice chairman of the Gems and Jewellery Export Promotion Council called it a step in the right direction. ``It will discourage fake exports and encourage genuine traders who have helped drive shipments of cut and polished diamonds.''

Shipments during 2010 to 2011 increased 55% to $28.3 billion. Exports of gold jewellery, including medallions and coins, climbed 33% to $12.9 billion, the council said in a report.

India's diamond rough imports rose 32% to $11.9 billion. While the United Arab Emirates was the largest export destination, accounting for 47% of the total shipments, Hong Kong was at 22% while the US was at 11%.

In the last fiscal year, exports was 30% to 35% higher than that in the previous financial year. Traders have said that some diamond companies, which owe banks several millions, had availed of cheap trade finance by circulating the same set of diamonds several times. The RBI's move would curtail any such deals in the future.

Source : mineweb.com