Getting rid of golden fetters
The Indian central bank could borrow from the Turkish example. In September 2012, the Central Bank of the Republic of Turkey (CBRT) introduced a similar scheme for Turkish residents. Turkey has quite a few parallels with India with respect to gold, among them the absence of a significant domestic output and large private sector holding. Turkey like India has also seen its CAD widening in recent years and as a result the Turkish lira has also been under pressure.
To encourage banks to raise gold deposits, CBRT allowed banks in Turkey to hold a part of their reserve requirements as gold, thereby transferring a part of publicly held gold onto the central bank’s balance sheet. With many Turks historically preferring to invest their wealth in physical gold instead of traditional banking instruments, estimates suggest that there may be as much as 5,000 tonnes of gold being held “under the pillow” in the country. These investments, which are effectively held outside the economy, could be converted to bank deposits while simultaneously allowing banks some leeway in their reserve requirements.
Initially set at 10% of reserve requirements, the level has been successively raised to its current 30% as the policy has succeeded in attracting gold back into the economy. Turkey’s banking sector regulator estimates an increase in the banking sector’s collective precious metal account rising from TRY1.8 billion (around Rs.5,746 crore today) in September 2010 to TRY15 billion by September 2012. This coincided with a rising Turkish lira and falling interest rates, until recently. Read More