Image Source: Getty
Gold, which historically signified societal prestige, has evolved into a key asset for financial security and foreign exchange. It tends to retain its liquidity during economic crises and political instability. India ranked second after China in consumer demand for gold in 2023, with an estimated demand of 761 tons. The precious metal price registered an 18-percent increase year-on-year, reaching a record of US$2,427/oz during Q2 2024. While the gold consumption patterns in India dipped in the previous quarter owing to escalating prices, demand is expected to rebound following the customs duty cut on gold imports from 15 to 6 percent.
India ranked second after China in consumer demand for gold in 2023, with an estimated demand of 761 tons.
India, recognising the enduring global value of gold, has taken a significant step by establishing the India International Bullion Exchange (IIBX). Launched in 2022 by the Gujarat International Financial Tech City’s (GIFT City) International Financial Service Centre (IFSC) in 2022, IIBX is the world’s third bullion exchange. It serves as a platform for the exchange and storage of physical gold, silver, and other precious metals in the futures market. With IFSC’s focus on attracting large-scale Foreign Direct Investment (FDI) and pioneering technological and financial advancements, and GIFT City’s Special Economic Zone (SEZ) offering tax incentives, IIBX is set to transform India’s gold market.
Externalities impacting international bullion markets
The London Bullion Market Association (LBMA), an international market established in 1987, deals with gold and silver bullion. LBMA’s standard gold guidance system is based on the Organisation for Economic Co-operation and Development’s (OECD) Due Diligence Guidance—a framework curating gold refineries, auditing, conflict-free metal sourcing and other aspects that impact gold prices. The quality provided by the LBMA is considered an international standard for the exchange of gold and silver. London Bullion Exchange’s Over-The-Counter (OTC) market sets the price of precious metals.
The quality provided by the LBMA is considered an international standard for the exchange of gold and silver. London Bullion Exchange’s Over-The-Counter (OTC) market sets the price of precious metals.
According to Reserve Bank of India (RBI) data, India has gold worth INR 5.5 trillion stored as foreign exchange (FOREX) reserves. However, currency fluctuations and geopolitical events can disrupt the FOREX market, eventually affecting these international assets. India can use its domestic bullion vaults to store its gold assets and avoid such disruptions and tax payments to international banks. Currently, the RBI stores a portion of India’s gold reserves with the Bank of England. While the security protocols ensure the safety of the bullion, they have also led to wide-scale issues during international transactions, with the LBMA often dictating the global bullion market’s regulatory umbrella. Therefore, India has aimed to curate its own international bullion exchange while promoting global market access to address these uncertainties.
The India International Bullion Exchange (IIBX)
The IIBX, regulated by IFSC, devises an effortless path for exchanging bullion with high-tech vaults and risk management facilities. It thus facilitates the easy delivery of precious metals directly to the jewellers in a limited time frame, reducing their dependency on the banks.
The IIBX is a central authority in the trades executed by the Stock Exchange, where it acts as a legal entity between the buyers and sellers from the time of execution to the settlement of the trade. IIBX acts as a common agent between them through Novation, a mediation process, reducing the counterparty risk. It also ensures a “settlement guarantee fund” to the parties by signing an agreement with depositories with significant risk management plans to avoid any transaction-related obligations of any members. IIBX permits an individual to become a Qualified Supplier or trading member in the exchange. The system will only source gold and silver from the supplier if the entity is a member of accredited exchanges, such as the LBMA, the CME Group (COMEX) and The Shanghai Gold Exchange International (SGEI). These mechanisms result in transparent, hassle-free and monitored import of bullion by the major players.
The IIBX is a central authority in the trades executed by the Stock Exchange, where it acts as a legal entity between the buyers and sellers from the time of execution to the settlement of the trade.
Deciphering regulatory measures
Banking
RBI Guidelines enable Indian Bank Units operating in GIFT-IFSC to act as Professional Clearing Members (PCM) and, recently, Trading Members. They authorise these banks to import gold and silver annually per the current Foreign Trade Policy and operate as Special Clearing Corporations[i] on the IIBX for gold and silver imports. With banking establishments increasing in GIFT City, IIBX will have to ensure constant expansion of bank participation within the IIBX.
Import control
RBI has allowed Tariff Rate Quota holders to import gold through IIBX to facilitate market access under the India-UAE Comprehensive Economic Partnership Agreement (CEPA). Some Indian refineries import unrefined gold from least-developed countries (LDCs) at zero duty. The government must reconsider existing import benefits for LDCs and treatments for trade in precious metals within upcoming Free Trade Agreements (FTAs) to ensure fair competition.
Operations and maintenance
The government must expand IIBX’s regulatory framework, detailing a standardised arrangement for stakeholder inputs, such as working groups, to enhance its operational efficacy. These norms include developing and enforcing human resources policies, ensuring key personnel meet requirements, and establishing statutory committees to manage day-to-day affairs. Timely clarifications concerning international sourcing and price discovery standards must be released for market participants.
The government must reconsider existing import benefits for LDCs and treatments for trade in precious metals within upcoming Free Trade Agreements (FTAs) to ensure fair competition.
With high-security concerns, IFSC must employ caution and transparency procedures when contracting private entities for technological solutions or inventory management. Additionally, incentivising local jewellers and small traders through financial support and training programmes will not only increase domestic participation but also foster a more resilient and competitive bullion market in India.
Conclusion
With INR 60 billion of equity inflows, Gujarat surpassed Karnataka in FY 2023-2024 in terms of FDI inflows. GIFT City, a key contributor to the FDI, will play a definitive role in the price setting of precious metals through the IIBX. The storage of gold or any precious metals in the IIBX vaults would be an advantage for sellers during the high-demand festive seasons in India. IIBX can ensure an adequate supply of precious metals during such peak demand periods, eliminating unnecessary players and charges. IIBX aims to transcend India’s gold market by connecting it to international markets and financial centres. By implementing robust policy measures, IIBX holds significant potential to streamline India’s bullion trade, attract more international business, and solidify India's position as a significant player in the global gold market.
Bhadra Ashok Kumar is a Research Intern and Dharmil Doshi is a Research Assistant at the Observer Research Foundation
[i] A clearing corporation (CC) is an organisation that manages the confirmation, settlement, and delivery of transactions on behalf of an exchange. They are beneficial for complex transactions, such as futures contracts, which are financial contracts that require a buyer to purchase an asset at a predetermined price and date in the future.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.