The report on ``Regulatory aspect of financial markets'' by the internal working group was submitted to the RBI deputy governor YV Reddy in June 1998. According to the committee members, forward trading in bullion -- if allowed -- will give the much-needed depth to the gold trading business in the country. The RBI has also made a proposal to the finance ministry to remove the ban on forward trading of bullion. A clutch of banks, which have received licences to trade in bullion in the domestic market, have also made a representation to the RBI to remove the ban on forward cover on bullion.

"With the removalof the ban, forward selling and buying of bullion will become possible, which will boost the bullion trading in the country," sources said. According to the proposal, forward cover on bullion will be in line with the forward cover on foreign currency. To start with, forward cover ranging from one month to six months will be allowed, which will enable bullion trading banks to hedge against any price fluctuation in bullion. At present, no hedging mechanism is provided to bullion traders to protect them from the vagaries of price fluctuations.

According to sources, if allowed, besides developing the domestic bullion market, forward trading in bullion will help the banks as they would not be required to hold large inventories. "They will be in a position to sell in forward markets if the rates are high and buy in spot if the rates are low," sources said.

A senior banker with a nationalised bank, which has been into active bullion trading, said: "Withdrawal of the ban on forward cover will give a big push tothe gold business in the country. The gold business has lost its glitter as banks have been booking losses in the absence of forward cover as the demand has been negligible."

Last November, Bank of India entered into a strategic alliance with Swiss Banking Corporation for managing risk on gold-related financial products. Canara Bank, Indian Overseas Bank, ABN Amro Bank, Standard Chartered Bank and Bank of India plunged into gold retailing in November followed by Allahabad Bank, Bank of Nova Scotia, Corporation Bank and Dena Bank. The State Bank of India kicked off retail bullion business last week.