The Reserve Bank of India (RBI) is considering fresh curbs on gold imports as unabated demand for the precious metal further drives up an already heavy current account deficit of the country.

India, the world's biggest consumer of the metal, imports 900 tonnes of gold annually. Gold is also the second largest item (in value terms) in the country's import basket after crude oil.

The RBI move comes close on the heels of the commerce ministry last month hiking import duty on gold to 6 per cent from 4 per cent.

RBI has proposed a combination of measures aimed at demand reduction and supply management along with measures to increase monetisation of idle gold.

In order to reduce demand for gold, RBI suggested better documentation of gold deals and ensuring a better tax treatment of gold. ''There is a need to design innovative financial instruments that can provide real returns to investors, ie, inflation indexed bonds,'' RBI said.

In order to unlock the hidden economic value of idle gold in the country, RBI suggested introduction of products like `Gold Accumulation Plan', `Gold Linked Account', `Modified Gold Deposit' and `Gold Pension Product', after a careful evaluation of regulatory issues.

RBI also said it could limit gold imports by banks in ''extreme circumstances'' as the country's trade deficit reached a record 5.8 per cent of is gross domestic product (GDP).

RBI sees a CAD in the 5.5-6.0 range for the next three-four quarters as sustainably high – a case of an ''extreme situation."

RBI suggested a review of the preferential treatment accorded to gold imports in import procedures. It also suggested a complete ban on bank financing of gold bullion purchases as also differential pricing of banking services and finance for gold imports.

While banks may continue their role in gold imports – banks currently account for around 60 per cent of the country's gold imports - RBI said the government may impose quantitative and value curbs on gold imports.

In order to increase domestic availability of gold, RBI suggested increased recycling of scrap gold, which would restrict the need to import more gold.

RBI proposed to remove incentives for banks to trade bulk gold with jewellers as banks have been charging them rates below the so-called base rate offered to their best customers.

"Creation of alternative asset class that may provide returns comparable to return on investment in physical gold with similar flexibility is important," the RBI said in a report released today.

RBI is also considering setting up a gold bank, which would both buy and sell idle gold from individuals, a measure intended to improve supply of the 20,000 tonnes of idle gold held by individuals and bring down pressure for imports.

Of that 20,000 tonnes, only three per cent is used as collateral against loans.

"If we cannot bring down the demand for gold significantly, at least, we need to ensure that the gold is put to an economic use through disbursal of gold loans for productive and consumption purposes," said the RBI.

The RBI is also considering allowing banks to access future markets to hedge their bulk gold purchase risk.

Banks may, however, expand their gold jewellery loan portfolio to monetise the stocks of idle gold. They should also continue to advance loans against gold.

There should, however, be a close check on the rapid growth of assets, borrowings and branch network of gold loan NBFCs, RBI said.

RBI also suggested curbs on NBFCs' heavy borrowings from the banking system and a gradual reduction in their interconnectedness with the formal financial system.

Besides, the RBI suggested better disclosure norms for gold loan NBFCs, rationalization of gold loan interest rates, monitoring implementation of fair practices code, standardisation of  documentation to be followed by gold loans NBFCs, use of PAN card for large gold loan transactions, payment through cheque for large gold loan transactions etc to reduce dependence on gold.

RBI did not see a need for conceding level playing field for gold loan NBFCs with the banks. It, however, suggested a review of the extant 'loan to value ratio' and a well-defined and standardised concept of the term 'value'.

Gold loans have only a causal impact on import of gold, which has a liquidity motive and international gold prices and exchange rates significantly and positively affect gold price in India.

While gold loans tend to increase with rising prices of gold, these do not have any great impact on gold imports, RBI said.

However, a sharp and sudden drop in gold price by 30 to 40 per cent is a remote possibility that can cause financial distress to the gold loan NBFCs.