In 2013, the Indian rupee went into a free fall. A high current account deficit (CAD) had made India vulnerable to an adverse external event. Thus, when the US Fed dropped a hint about ending QE, foreign money fled Indian shores. The rupee promptly tumbled against most western currencies, dropping to nearly 70 to a dollar.
What was the government's response? Among the most important measures taken by the RBI and the UPA government was to put restrictions on gold imports. Gold is India's second largest import item and it was easy to target. Many curbs were imposed, prominent ones being the following:
Prohibiting banks from providing gold to domestic users on credit.
Mandating the export of 20% of the imported gold (the 80:20 rule).
Barring the sale of gold by banks 'over the counter'.
These restrictions long with higher import duties had severely hurt the jewelry industry. While the rules helped to bring the CAD under control, the gold industry in India faced hardship. Since then, these restrictions have been eased. In November 2014, the 80:20 rule was scrapped. The government has now allowed banks to resume lending against gold to jewelers. This is a welcome move.
We believe the restrictions were ill-advised in the first place. Historically, gold has been a means of saving and a hedge against the government's mis-handling of the economy. It will be best if the government stops interfering in the Indian gold market altogether. Indeed, it would be ideal if the government would take a proactive approach to make gold more easily available to consumers. This would not only help to curb smuggling but would also give a boost to the industry. While such a comprehensive policy on gold is still some way away, the government is certainly moving in the right direction we believe.