Targeting temple gold: Is it a solution for the battered rupee?

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Temple gold: Is it a solution for the battered rupee?
Desperate times need desperate measures and it's also a time when your imagination is at its fertile best.

Everybody is talking of the battered rupee and how best to prevent it from sinking even further below its record of 68.81 against the dollar.

The problem

The rupee is sinking because we have a current account deficit, which arises when we spend more dollars then we earn. There are two areas where we spend more dollars. One is crude oil, which we are compelled to import resulting in a dollar outflow and the other is gold, which we are not compelled to import.

Import of gold certainly has wrecked havoc with the deficit, and has been one reason for the rupee to be trading at 66.26 currently.

Now, there are suggestions that we target temple gold to prevent import of gold and hence a sharp fall in the rupee.

A trove of gold from some of the popular temples is stashed away in banks. According to reports in the Economic Times the Tirumala Tirupati Devasthanam has a staggering Rs 70,000 crores in various forms of gold.

The report also points to the fact that the Sree Padmanabhaswamy temple could have as much as 100,000 crores, though these are not confirmed.

There are now innovative suggestions to utilise this gold and prevent gold imports. One suggestion is to take these gold from the temples and pay interest on it and convert it into bullion.

Suggestions are good and welcome, but targeting temple gold is not practical. It's going to hurt the sentiment of devotees and there is already a clear sign of resentment at this mode.

The Reserve Bank of India (RBI) recently clarified that it is not contemplating any proposal to buy idle gold and convert it into bullion, after reports surfaced on idle gold stashed away in temples.

"The RBI clarifies that no such proposal is under its consideration at this juncture," the apex bank said in a statement.

Clearly, the temple gold is going to be a far-fetched idea with no takers.

A novel method

A better suggestion was reported recently by Reuters, which could be a welcome move.
According to the news report, India is considering a radical plan to direct commercial banks to buy gold from ordinary citizens and divert it to precious metal refiners in an attempt to curb imports and take some heat off the plunging currency.

This seems a more sensible idea, especially, if you can price the gold at slightly higher then market rates and lure individuals.
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Re-cycling the gold that is already in the system is an innovative idea. After all, we imported 860 tonnes of gold in 2012, while we are already sitting on a staggering 31,000 tonnes, which can be recycled, provided individuals are offered the right price.

Apart from gold, we must remember that the rupee has sunk primarily because of oil and over dependence on capital inflows, primarily inflows into the capital market, which can exit anytime and cause a currency collapse, as it has recently.

We need to therefore boost FDI policies (more permanent dollar inflows which cannot exit), encourage exports and have stop meddling in the affairs of our local oil and gas companies, so they can boost domestic oil output and reduce dependence on imports.

GoodReturns.in

Read more about: dollar, current account deficit, gold
Story first published: Saturday, September 7, 2013, 11:09 [IST]
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