At a time when China is hurrying to open up its gold bullion sector, India is shying away from allowing banks to invest in Gold exchange-traded funds (ETFs).

This has come to light recently as the Forward Markets Commission (FMC), the commodity futures market regulator, suggesting to the Reserve Bank of India (RBI) that banks should not be allowed to invest in gold ETFs.

Recently, the banks had sought permission to invest in ETFs, besides more flexibility in gold trading. China this month had decided to let many banks to import and export gold for consumption and also open gold trading to foreign companies.

This move will certainly help gold demand as the Chinese market is huge in size and is yet to be tapped properly. China is also shopping for large scale new gold sources across the globe. Beijing is also creating new consumer products to boost demand and stockpiling more gold in its reserves.

Instead of taking a leaf out of the Chinese lesson, FMC is planning to tell the RBI that gold trading is its domain, not that of stock markets, as the metal is a commodity. It is also arguing that since banks are not allowed to even hedge on commodity futures exchanges, there is no justification in allowing them to invest in an instrument having gold as the underlying.

A couple of months ago, FMC had objected when the Securities and Exchange Board of India (Sebi) permitted the National Stock Exchange (NSE) to start options trading in gold ETFs. It said options were not allowed in the commodity futures market. NSE had dropped the plan.

Previous proposals to launch ETFs based on silver and crude oil were also not allowed. A decision has since been taken to give an autonomous status to FMC. Once the bill amending the FCR Act is passed and FMC gets enough powers, its chairman will find place on the Sebi board and Sebi's chairman on the FMC board. The issue of who will regulate commodity-based ETFs is expected to be sorted out after that.