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By Suvashree Dey Choudhury and Manoj Kumar
MUMBAI/NEW DELHI, May 21 (Reuters) - The Reserve Bank of India and finance ministry officials will recommend that the new government relax strict gold import rules to head off a surge in illegal buying, officials with direct knowledge of the plan said.
Last year, India imposed restrictions on gold imports, the second biggest import after oil, following a steep rise in the country’s current account deficit.
However, the curbs spurred smuggling into India, the world’s biggest buyer, through illegal “hawala” channels, which are informal international networks for remitting money.
“We don’t want to suppress demand artificially as it is creating hawala money. The longer you wait, the more will be such parallel channels,” one of the officials said.
India’s incoming prime minister, Narendra Modi, who led the opposition Bharatiya Janata Party (BJP) to a decisive victory in a just-concluded election, has indicated his willingness to remove the gold curbs.
Modi will be sworn in on Monday and the plan to ease the curbs is ready for his government to take up.
“The next finance minister can sign the file on gold imports whenever he wants to sign it,” one of the officials said.
The curbs would be removed in phases, the officials said.
The RBI did not have immediate comment.
“Let the new finance minister take charge. Only then such issues can come up for a decision,” said D.S. Malik, spokesman at the Ministry of Finance.
India raised the gold import duty last year to 10 percent from 4 percent and also mandated that 20 percent of imported gold be exported, which is known as the 80:20 rule.
India’s current account deficit hit a record high of 4.8 percent of gross domestic product, or nearly $88 billion, in the fiscal year that ended in March 2013, pushing the rupee to a record low of 68.85 to the dollar in August.
The crackdown on gold imports helped trim the current account deficit to 0.9 percent of GDP in the December 2013 quarter, compared with a record 6.5 percent a year earlier, while the rupee has strengthened to 58.81.
The central bank met on Monday with officials from top gold importing banks, including Axis Bank, Bank of Nova Scotia and State Bank of India, to discuss the difficulties posed by limited supplies, according to two bankers who were present.
Roughly 200 tonnes of gold were imported illegally in 2013, according to industry estimates.
Legal imports totaled 860 tonnes in 2012, but eased to 825 tonnes in 2013, when the curbs were imposed, and stood at 190.3 tonnes in the first three months of 2014.
Amid expectations the curbs will be relaxed, premiums on gold in India fell to $88 an ounce on London prices on Wednesday. International prices traded at $1,293 an ounce. Premiums rose to a record high $160 an ounce in December.
“Modi has committed to us that he’ll come out with a solution,” said Kumar Jain, vice-president of the Mumbai Jewellers Association.
“We expect some good news to come in July either by lowering of import duty or easing of 80/20 rule.” (Additional reporting by Siddesh Mayenkar in MUMBAI; Editing by Tony Munroe)