Mumbai: India, the world's biggest buyer of gold, doubled margins on trading in gold futures effective Monday in a bid to tackle volatility after local prices of the metal rose by nearly a fifth this month to hit a record high.
The move is not related to India's numerous other measures to dampen buying of physical gold as the nation grapples with a widening current-account deficit and a tumbling rupee currency. India imports almost all of its gold.
But it is seen denting participation in futures trade and hurting the Multi Commodity Exchange (MCX), the country's biggest commodities trading bourse, which garners significant revenue from precious metals.
The Forward Markets Commission (FMC), which regulates the commodity futures market, hiked initial margin to 5 percent from 4 percent earlier, and also imposed an additional 5 percent margin on gold, silver and crude oil futures contracts from Monday.
"It will have an impact on volumes and participation. Due to high cost or margins, a trader would take only one lot compared to two lots earlier," said Haresh Galipelli, vice-president with Inditrade Derivatives and Commodities.
A trader would now have to pay 330,000 rupees as margin to buy or sell a lot of gold of 1 kg from Monday as against 130,000 rupees earlier.
The Multi Commodity Exchange recorded a daily volume of 28.8 tonnes on an average in August, with most the volumes coming from speculators.
"Volatility is forcing the FMC to hike margins. But, once volatility goes down margins will come down again," said Gnanasekar Thiagarajan, director with Commtrendz Research, adding volumes could fall by 25-30 percent due to the measure.
Most of the price gains on gold futures on the MCX have been due to record weakness in the rupee, which plays an important role in determining the landed cost of the dollar-denominated asset.
In the physical markets, imports are yet to resume into India as traders await operational guidelines from the customs department, with premiums holding steady in a market that has not seen fresh supplies for more than five weeks.
To contain a record trade deficit, the federal government has put an upper cap on imports, by tying shipments for domestic consumption with exports, and also raised the import duty on the yellow metal for a third time in the year in July to 10 percent.