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

Its A big NO For Gold Deposits!!  RBI opposes finance ministry plan to use gold deposits as bank CRR and said banks may hoard excess gold if it is included in CRR (Cash Reserve Ratio) existing rules do not permit usage of gold as bank CRR.  This 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.

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.”

The government was considering allowing banks to utilise gold mobilised under the monetisation scheme for meeting mandatory liquidity requirements set by the Reserve Bank of India.

To incentivise banks, it is proposed that they may be permitted to deposit the mobilised gold as part of their CRR/SLR requirements with RBI. This aspect is still under examination,” a draft guidelines on Gold Monetisation Scheme had stated.The Finance Ministry has sought comments from stakeholders on the draft gold monetisation scheme by June 2.

According to a report published early this year, RBI logic was that the proposal to use gold as CRR is counter intuitive. “In case of capital inflows, the banks may be asked to keep forex and gold as CRR. Assuming constant inflows, the value of rupee against dollar is likely to rise. Hence, the value of stock of forex and gold kept as CRR, will diminish with rising rupee,” 

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.”

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