MUMBAI (TIP): In a move to support the rupee, the Reserve Bank of India on Tuesday announced measures to curb gold imports in tandem with the government measures to encourage foreign capital into debt. The concerted measures brought back the rupee and also crashed gold prices in international market. However, many feel that gold curbs were a short-term solution and would lead to a price differential between local and international prices which would encourage smuggling of the yellow metal.

Besides extending to nominated agencies and star trading houses restrictions on gold imports that were applicable to banks, RBI has also insisted on 100% cash margin for letters of credit. RBI has also curbed credit by insisting that imports will be on documents against payments as against “documents against acceptance” earlier. As a result of these measures, the rupee recovered from 11-month lows to close at 56.45—a 32 paise gain from Monday’s close of 56.77.

The restrictions on gold imports come after imports of the yellow metal soared to 162 tonnes in May from 142 tonnes in April following a softening in international prices. “This will lead to a reduction in imports and reduce supply. Local prices may go up and this could also lead to some jewelers turning to unauthorized imports.” said Mohit Kamboj, president, Bombay Bullion Association . Bankers also said that the move could have only shortterm benefits as a demand supply mismatch could lead to local prices firming up vis-a-vis international prices providing a huge arbitrage opportunity for importers.

According to news reports, gold fell below $1,400 an ounce in London on Tuesday, extending losses on worries over demand in the world’s largest consumer, India, after the government further restricted imports of the metal. “The rupee gained because of a combination of the measures to restrict gold imports and news that the government was extending ceiling on FII investment in debt and reduction of withholding tax on overseas investment in debt,” said Ashish Vaidya, head of fixed income, currency and commodities trading, at UBS.

Inflation index bonds: The twin measures to support the rupee coincided with RBI’s auction of the government’s first tranche of inflationlinked bonds. RBI sold Rs 1,000 crore of bonds at a yield of 1.44% over the wholesale price index. This is RBI’s second attempt at introducing inflation linked bonds after an attempt in 1997 failed to meet expectations .