Gold demand is likely to fall as easing of general inflation rate will make investment in financial products more attractive than the yellow metal, PMEAC Chairman C Rangarajan said today.
Also, the steps being taken to curb gold demand are expected to bring down the current account deficit (CAD) by 0.4-0.5 per cent of GDP in the current fiscal, he said.
"Some action has been taken by RBI in terms of controlling gold demand. To supplement these actions, as inflation comes down and returns on financial products become more attractive, it will be possible to contain gold demand," Rangarajan said on the sidelines of gold summit organised by Assocham.
The Prime Minister's Economic Advisory Council (PMEAC) Chief further said that "inflation is showing signs of coming down and therefore attraction of financial products will be greater".
The overall inflation came down to over three year low to 4.89 per cent in April.
Expressing concern about higher gold imports in April, he said: "The imperative to contain gold import has become urgent. The recent surge in gold demand is however creating some distortions and need to be rolled back to boost growth by reversing the trend of declining financial savings and keeping CAD within prudent limit by contain gold demand."
As a first step, gold demand in India -- the world's largest consumer -- needs to brought down from the current level of 1,000 tonnes per year to 700 tonnes, which prevailed few years ago, he said.
Stating that taming inflation and enhancing the real rate of return on financial products are best ways to contain gold demand, Rangarajan suggested that the government must act on ensuring financial products from bank deposits to mutual funds give adequate returns so that investors shift to these products from gold.
Gold-related schemes and inflation indexed bonds are also being presently contemplated as strong substitute to gold so as to reduce physical holding of the yellow metal, he added.
Asked if more curbs will be imposed in the coming days, Rangarajan said: "The approach of the government and RBI have been very cautious. ...Some fiscal and administrative actions such as the increase of import duty can be, and recently have been, taken to dampen demand."
The country's CAD has widened due to increased gold imports, which rose to 1017 tonnes in 2012-13 from 471 tonnes in 2000-01. Gold imports during last year accounted 72 per cent of the CAD.
Asked if the government could control oil imports to bring down CAD instead of imposing too many curbs on gold, Rangarajan said: "crude oil is an important input, pre- requisite for growth. But certainly two-three aspects can be taken care."
"We have created additional refineries so that crude oil is imported for refining in the country and then exported. The efforts are being made," he said.
That apart, petrol has been deregulated. "We are almost on road to deregulate prices. We are also exploring better opportunities for oil production within the country. Certainly steps are being taken," he said.
On gold prices, Rangarajan said that they are "unlikely either to go up or go down substantially in the coming days", though some fell that prices may see a correction.
Global gold prices have come down to USD 1,440 per ounce now from the peak of USD 1,771 per ounce in September, 2011, he said, adding that the recent decline has been very sharp almost by 16 per cent as of now.
He suggested that gold demand could also be reduced by improving the institutional mechanisms for domestic trading in gold as there is an asymmetry in the ease with which gold can be bought and sold within the country.
Setting up of Bullion Corporation can have a wide mandate with primary objective to mobilise the domestically available gold into the hands of financial institutions, he added.
World Gold Council India Managing Director Somasundaram PR, who was also present at the summit, said: "India has an estimated private gold stock of 20,000 tonnes worth USD 1 trillion, while it mines only 1.5 tonnes. The government policy direction should be towards making use of this private stock."
A survey conducted showed that 64 per cent of women in India want to buy gold jewellery despite awareness about other financial products, he said.
At global level, Somasundaram said new finds of gold are increasingly elusive and this is putting pressure on supply. World gold productions has remained flat at 3,000 tonnes, while demand is about 4,000 tonnes.
Leading commodity bourse MCX Chairman Venkat Chary said that 40 per cent of the world gold stock is lying in India in the form of jewellery and some in temples.
The recent policy decisions taken by the government on gold is encouraging smuggling and creating confusion in investors' mind.
"There is lot of confusion in public mind whether to buy gold ETFs or physical gold," he shared.