RBI opposes finance ministry plan to use gold deposits as bank CRR

NEW DELHI: The Centre's attempt at monetising gold lying with Indian households may face a road block with the RBI writing to the finance ministry opposing a plan to use gold deposits as bank Cash Reserve Ratio (CRR).
Finance ministry sources told ET Now that in its reservation against the move, the RBI said banks may hoard excess gold if it is included in CRR and also said the existing rules do not permit usage of gold as bank CRR.

Gold as CRR will weaken its effectiveness as monetary policy tool and may expose RBI's reserves to risk from commodity prices, the central bank has told the finance ministry.

ET Now Consulting Editor Mythili Bhusnurmath said RBI's reservations are mainly because it sees CRR as monetary policy tool. "Its reservations are valid because RBI's monetary policy mechanism is weak and if you allow CRR to be held in the form of gold then it will further weaken policy."

Playing down on any impact on the scheme, Bhusnurmath said RBI's reservations against the scheme in its current form should be only seen as those by a monetary policy authority.

RBI said CRR reserves are usually used to stabilise the financial system but allowing gold as CRR will expose the central bank's reserve to commodity risk. It also said that allowing banks to use gold as a part of CRR would mean excess hoarding of gold by the banks, which is the central bank feels is not desirable in the financial system.

With RBI making its point clear, will the proposal now go back for a tweak by the finance ministry?

Probably not. Sources told ET Now that finance ministry has already collected stakeholder comments on the gold monetisation scheme by June 2 and will take up the matter with the central bank. The finance ministry feels the gold that is currently available in the Indian financial system should not be unaccounted. The argument is that if gold is allowed as a part of SLR, it should also be allowed as CRR.

Saugata Bhattacharya, Economist, Axis Bank, said there are more risks to having gold as being part of CRR than SLR. "There is price risk because CRR is a cash-based instrument...There will be issues on having haircuts for gold. Then there is settlement risk associated too...we must also not forget location risk on where the gold will be stored. These are some of the reasons playing on RBI's mind."

"Having said that, the current objections may not affect the government's plan. It may not be impactful for retail depositers, but for large institutional holders of gold such as temples and trusts, monetisation scheme will work," he added.

DK Mittal, former finance secretary, said it will be a challenge for the government to pull this plan off. "But for that both banking regulation and RBI Acts need amendments."

"The scheme does make a difference, it will be good if there are two such schemes -- one for retail depositers and another of institutional holders. The policy needs to be revised on those lines, " he said.