The yellow metal that has been traditionally looked upon as a store of value or hedge against inflation is now experiencing tremendous investor interest globally. All types of investors are seen seeking gold as an important component of their portfolios. The trend has often resulted in what can be called as the process of ‘financialization’ of gold. The process thus implies that financial investors and intermediaries have started looking upon gold and the related derivatives as a financial instrument that could be bought and sold.

Being exposed to the financial system, the metal experiences inflation across the globe. No wonder, the metal that traded around USD 400/ ounce a decade ago now trades at around USD 1300 oer ounce, a hike of almost 225 percent. Ofcourse other factors too are responsible for the price though financialization is one of the dominant ones.

The craze and the intensity to covet physical gold in the form of jewelry and as an investment option has reached alarming dimensions in India. This has prompted the RBI to impose curbs, raise duties so as to keep a check on the demand.

The series of import duty hikes initiated by the RBI took the duties from 2% in January 2013 to 10% in August 2013. RBI’s introduction of 80:20 scheme restricted the metal’s imports and uses, thus, leading to a squeeze in domestic supply. The curbs not only distorted local premiums but also disturbed the correlation of our prices with international prices that changed from 97.7% in 2012 to 91.7% in 2013.

Along with oil, gold imports have contributed immensely to high trade imbalance. Given the fact that gold has contributed nearly 30 percent of trade deficit during 2009-10 to 2011-12 (RBI, 2013), the RBI steps on curbing domestic supply hold significance. In the above circumstances, financialization of gold could be an effective remedy to the situation and the RBI too supports the same.

Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs has suggested introduction of products like gold accumulation plan, gold-linked account, modified gold deposit and gold deposit. India has a robust savings rate of around 30 percent as compared to developed countries while there is predominance of household sector savings (at around 70 percent) in the composition of Gross Domestic Savings .

Further, over 60 percent of household savings are channelized in physical assets and thus stay away from productive financial investments. Hence, attempts to financialize gold would help release idle gold held by households in the financial system. It would also help deepening of Indian financial sharemarkets.