A weaker rupee, combined with a rising dollar gold price, has been playing out in local gold prices closing at an all-time highs. India’s GDP growth has been on a downward trajectory since the first quarter of 2019. Against such a backdrop, consumer spending on non-essential items had declined. This was accentuated by the outbreak of Covid in March, with the result that middle-class urban consumers and rural consumers became more cautious in opening their wallets to purchase gold, and footfall to jewellery stores slowed early in March, leading to the gradual closing of retail stores.

Globally, the pandemic fuelled safe-haven investment demand for gold, offsetting the marked weakness in consumer-focused sectors of the market. But in India, having fallen prey to soaring local gold prices, retail investment in gold came to a halt. Availability of bars and coins became problematic after the gradual closure of retail shops.

But this led to Interest in digital gold products – a trend we noted last quarter – continuing to grow as it was obviously easier to buy gold via such platforms. This echoed the rise in demand for ETFs in India, which saw relatively sizable inflows of 4.4 tonnes as investors rushed to meet their safe-haven needs.

In this context, the World Gold Council has prepared a report on the basis of experience from countries with established bullion banking to develop similar banking activity in India, which it says has tremendous scope for growth, given the size of the country’s gold market.

India is the second largest consumer of gold in the world, but the domestic gold industry is beset with challenges including lack of quality assurance, an unorganised state of the market and weak positioning in international markets. These weaknesses lead to a detrimental economic impact. Given both the size of the market and its impact on the Indian economy, the challenges faced by the gold industry need to be addressed.

Several countries, including the UK, US, China and Switzerland have fully functional, well-organised bullion markets. In these countries, participants access the bullion market through bullion banks. The critical role that bullion banks play in well-regarded gold markets worldwide – and the broad range of services they offer – suggest that an effective bullion banking market could bring multiple benefits to India. But the development of such a market requires determination and commitment.

A bullion bank facilitates the purchase, sale and use of standardised bullion or bullion-based derivatives. Similar to commercial banks, bullion banks provide a range of products and services, centred around deposits, advances, sales and trading. Customers span the bullion value-chain, including central banks, miners, refiners, jewellers and investors, both retail and institutional.

According to the council, bullion banking is one of the key pillars to address these challenges and help establish India’s position among leading global and regional markets. However, India will need to address a few developmental roadblocks in building a bullion banking ecosystem, namely – regulatory restrictions, lack of infrastructure and limited bullion banking expertise.

Bullion banks act as intermediaries in the bullion market and facilitate interaction between various participants along the bullion value chain. They play a key role in the activities of the global bullion market, such as liquidity providers, market development agents and infrastructure developers.

Bullion banks serve customers across the bullion value chain, including miners, refiners, jewellers and investors. These customers have diverse needs and therefore use a diverse range of products. Traditionally, the bullion market was dominated by the UK and US and served primarily by global banks. However, the emergence of organised markets in China has created a new dynamic. Today a large number of Chinese banks participate in the bullion banking market too.

Bullion banking operations differ significantly across different geographies, based on the needs of local participants. However, there are four key factors that are common across most markets and have, overtime, contributed to the success of bullion banking operations globally. These include role of central banks, product flexibility and incentives, storage and delivery infrastructure and finally risk management.

Currently, Several RBI restrictions prevent banks from playing an active role in the gold market, where imports and exports are highly controlled. Banks are not allowed to trade in the domestic physical and derivatives market, so market development is limited.

The absence of Good delivery standards in India prevents banks from playing an active role in the domestic physical trading market. The lack of an organised gold trading market imposes further challenges, making it hard for banks to offer holistic solutions to customers, including brokerage, risk management and physical custodian services.

Also, Indian banks have limited expertise in bullion banking operations, such as risk management practices, physical custodian business and gold-backed product solution. They also lack the technological architecture required for gold trading. (IPA Service)