The Reserve Bank of India's move to restrict letters of credit for bullion imports to 90 days has hit the Rs 6,000-odd crore (about Rs 60 billion) jewellery export market.
Exporters usually require gold loans for 120-360 days to manufacture jewellery and provide time for foreign buyers to fix the price of gold content in the jewellery exported.
RBI's guidelines go against the government's export and import policy, which allows pricing of gold even after 180 days of exports.
"RBI's circular stating that the period of LCs for direct import of gold should not exceed 90 days, has in one stroke killed the jewellery export market," said Bhargava Vaidya, a senior bullion consultant.
With the implementation of the circular, gold jewellery manufacturers will need to hedge their risk in terms of volatility in gold prices.
"This would add to our costs by 0.5 to 1 per cent. It is not possible to hedge the same in the local market as we would also need to hedge our foreign exchange exposure," said Vaidya.
The new restrictions on LCs will result in a shortfall of gold jewellery and article exports of Rs 10,000 crore (Rs 100 billion) annually, said Suresh Hundai, president of the Bombay Bullion Association.
"This will also render lakhs of workers and artisans in the jewellery trade jobless," he added.
The circular issued last Saturday has sent negative signals to the industry especially at a time when the country is promoting its jewellery through India International Jewellery Show, currently taking place in Mumbai.
This further handicaps India from being internationally competitive especially with major players such as Turkey, Malaysia and China. Today India's share in the global bullion jewellery market is less than 2 per cent.
Exporters need unfixed gold for the period of manufacturing and till the goods are exported. Sometimes, a further period of gold loan is required to allow time for the international buyer to price the gold content in the jewellery.
The industry has been for the last few years advocating gold loans for jewellers and jewellery manufactures, which is the best way to neutralise gold price risk for traders and manufacturers, said one of the country's largest jewellery exporter.
"World over gold lease rate is lower than currency interest rates. Hence the central bank's argument of interest rate arbitrage is very sad and aimed at harming local trade," added Vaidya.
