It would also help facilitate a programme that could reduce India's massive gold imports, the largest in the world.

The government last week allowed the Reserve Bank of India (RBI) and banks authorised by the RBI to enter into forward contracts for the sale and purchase of gold in the country.

``It will provide a risk cover for banks and open up the international window at a later stage,'' said group financial controller at Inter Gold (India) Ltd, Nayan Pansare, a jewellery exporter.

India is the world's largest gold consuming market and meets almost all its requirement from imports. India's official gold imports were 614 tonnes worth $5.8 billion in calendar 1998, World Gold Council (WGC) data show.

Adding in unofficial imports would increase that total by 10 per cent, theindustry funded WGC says.

The announcement that domestic forward trading will be allowed meshes with plans by a cluster of state-run Indian banks to raise 100 tonnes of gold from private holders in the first 12 months of a new government-sponsored gold deposit programme

Under the scheme, investors would deposit gold with banks, receiving in exchange fixed-term interest-bearing certificates or bonds. Gold depositors can take back their gold or the equivalent in rupee terms when the instrument matures.

The banks would lend out the collected gold to jewellers and other merchants in the domestic market, traders said.

``With the hedging rules having come through, a major hitch (for the plan) has been removed, but some tax matters have to be resolved,'' said executive director of Indian Overseas Bank, RV Shastri.

Finance minister Yashwant Sinha in his budget proposals for 1999-2000 (April-March) had announced the gold deposit system to recycle a part of India's massive gold reserves lying in private handsand to cut down imports, and thereby generate investment funds from a large pool of idle assets.

Indians are estimated to have a gold stock pile of about 10,000 tonnes, accumulated over generations. It mainly comprises family heirlooms and jewellery that form part of dowry gifts.

``Implementation of the gold scheme is bound to be slow as it means a cultural change for people. They will need to part with their gold and reclaim it later,'' Pansare said.

Banks are waiting for the green light from the central bank to go ahead with the plan, but sources say that in any case the scheme cannot kick off in a major way until independent assaying and refining facilities are prepared.

These facilities would help determine and set a benchmark on the quality of gold offered by the investors.

``The assaying facilities will also have to be set up. Till those facilities come up, we will have to use the government mint,'' Shastri said.

The assaying centres will be located in a few main cities and are expected tostart operating in a few months.

``Various states have different local tax rates which may hinder smooth movement of the gold collected by banks,'' Shastri added.

Banks are also yet to set the interest rates they will pay their gold depositors.

``There still remain a number of clarifications such as whether the trading community will be allowed to hedge, before the scheme takes off,'' said financial institutions manager at the WGC, Derrick Machado.