The government of India has allowed registered jewelers, non-resident Indians, and institutions to import gold through the International Bullion Exchange (IIBX) directly and hopes that its launch will "facilitate efficient price discovery with the assurance of responsible sourcing and quality, apart from giving impetus to the financialization of gold in India".
The exchange will have a storage capacity of over 125 tons of gold and 1,000 tons of silver.
Sputnik spoke with Dr. Ravi Singh, vice president and head of research at Share India, about the ambitious launch and what it means for the world's fourth-largest economy.
Sputnik: India is the second largest consumer of gold, but doesn't have much influence on the global markets. Will the launch of the bullion bourse change the situation on global gold markets?
Ravi Singh: The gold market in India is scattered, with numerous regulators overseeing different aspects of the trade. As a result, despite its significant size and important global position, the Indian gold market is unable to realize its full potential due to multiple challenges, including lack of quality assurance, weak price transparency, fragmented liquidity, and regulatory issues.
The IIBX will be a gateway for bullion imports into India, where all bullion imports for domestic consumption shall be channelized through the exchange.
In this way, it will not only provide a trading avenue to various participants, but the advantages of price discovery, transparency in disclosures, guaranteed centralized clearing, new product launch, and assurance of quality will also be offered.
The move is seen as a game changer for India's bullion industry and is expected to put India in a position to set its own price of gold and will also able to establish an organized supply chain system.
Sputnik: SGX, London OTC, and Comex have established bourses. China has also launched a bullion exchange. Where does the Indian bullion exchange stand compared to them?
Ravi Singh: It is important to note that India is now the second-largest consumer of gold after China in the world. Official data shows that 700 to 900 tons of gold is being imported annually. However, since the country continues to follow the London Bullion Market prices, gold prices remain higher.
Launching the Indian gold exchange could lead to higher domestic consumption of gold as it would eventually lead to lower prices as the country moves from a "price taker" to a "price setter" in the domestic gold market.
Sputnik: Will a higher duty pose a significant challenge to the Indian bullion exchange to flourish?
Ravi Singh: As per the report of the World Gold Council, India's official imports have continued to grow despite high import duty, with official imports averaging 760 tons per annum since the first duty hike in 2012.
Imports made up 86% of India's gold supply between 2016-2020, despite high import duty.
Also, Gujarat International Finance Tec-City (GIFT-IFSC) currently attracts 0 percent tax, the advantage of which can be passed over to the market participants when the purchase of bullion is for investment purposes and the trade is back with the international markets (i.e., import and export of gold in bullion form).
So there are significant opportunities to emerge as a global bullion trading hub through the IIBX with a thriving domestic bullion ecosystem underpinned by globally recognized standards and infrastructure.
Sputnik: Many Indian jewelers work in an unorganized sector, meaning they are not registered. How will this impact the price discovery mechanism at the bourse?
Ravi Singh: India's bullion market is highly fragmented, and bullion prices vary significantly in various parts of the country. The lack of a standard benchmark across the nation is cited as the primary reason for its unorganized bullion market.
Apart from the unorganized market of traditional jewelers, there is a grey market for gold that is more distorting for the economy. This is all happening due to an utter lack of support on policy, the absence of spot exchange, investment, or research fronts, and no strategy to achieve the objective was in sight.
But now, after the setting of the gold exchange, such issues will be addressed and it helps India to become a genuine price-setter of gold and an integral part of the global value chain.
Sputnik: One of the significant aims of opening up the bullion exchange is to serve the global supply chain. How will this work?
Ravi Singh: The bullion exchange is expected to reduce gold imports in India by enabling recirculation of gold held with various market participants and providing uniform pricing and an open, ready delivery platform for all participants for trading physical gold.
It can help the government to improve the traceability of gold transactions, lead to effective tax/duty collections for imports and exports and enable India to emerge as a price setter for gold globally over a period of time.