Keeping in mind the “pressing need for structural reform in gold trading in India”, the World Gold Council (WGC) has proposed setting up a spot gold exchange. However, the council, in a report it prepared after discussing with the government and all stakeholders, has said that the exchange will not just be a trading platform but will build a whole ecosystem for the gold business, including ensuring even a jeweller or a B2B buyer/seller has equal opportunity for trading in gold and that he receives delivery at any location in the country.
The WGC plans to form a committee soon to help set up India’s first spot gold exchange, which is expected in 12-18 months. The time required will be used for setting up the ecosystem and developing infrastructure after the exchange is approved. According to sources, the committee will have all the stakeholders on board. The committee, which is likely to be formed in the December quarter, will help set up the exchange.
The committee is required because once the exchange is set up, market participants such as wholesale bullion traders and large refiners will need to play an active role in creating liquidity for the initial operations of the exchange. According to the WGC, banks shall be allowed to hold gold as cash reserve ratio (CRR).
The report also says that the “commodity transaction tax applicable to commodity derivatives exchanges shall not apply to the gold spot exchange,” and to promote all imported gold is sold on the spot exchange, “GST should not be levied until the point where gold leaves the exchange vaults under the exchange ecosystem by the taking of physical delivery”.
Apart from the WGC, the NITI Aayog has also formed a panel to discuss a national gold policy. The panel has formed five sub-committees to handle different aspects of the trade in gold. All sub-committees will submit their reports by next week and in at most a month’s time the Aayog is expected to submit its report on India’s proposed gold policy.
The report released on Thursday said that the exchange would provide a central venue for trading, a well-connected network of delivery locations where each location would be serviced by one or more vault operators, and a central counterparty to clear and settle trades. The exchange, functioning as a self-regulating organisation (SRO), would provide oversight on all these components and would also lay down norms for acceptable delivery standards and infrastructure providers. Furthermore, spot trades executed on the exchange can be used to define the India reference price, which could serve as the reference price for the over-the-counter gold market.
The report has identified several challenges which include “delivery standards, quality assurance to buyers, creating trust to increase Indian jewellery demand globally, transparency in pricing, and distribution across country”.
The council has said that there is scope for further catalysing the domestic gold recycling industry in a systematic and sustainable manner to mobilise idle gold lying in the country.
India buys 800-900 tonnes of gold every year, which is a third of the global mined production annually, but India is still a price taker and it doesn’t have a say in setting the price of gold. If there are India gold good delivery standards, whereby Indian refined gold is also acceptable as good delivery globally, it will help provide India a say in setting gold prices. If the quantity of India-refined gold grows, the selling price of India-refined gold will impact the LBMA gold price as India gold will add acceptable delivery flow to global gold supply.
The big challenge will be regulatory and hence the council has proposed a self-regulated exchange that will have norms for trading, buyers and sellers, supply chain and logistics to ensure a jeweller in the remotest part of the country receives delivery with an equal opportunity as a jeweller in a city.
“A spot exchange can serve as a catalyst to organise the fragmented gold market in India as it would bring together a number of key players across the gold value chain on the same platform,” the council said.
There are several other benefits of a spot exchange, as highlighted by the WGC. The traded price on the exchange can be used to establish an India reference price which will strengthen India’s position in the global gold market.
The spot exchange will enable players across the value chain to source physical gold without going through several layers of intermediaries. The exchange will enable financial institutions to launch gold-backed products more effectively, thereby providing a strong impetus to government initiatives for monetisation of household gold.