The draft guidelines issued for the Sovereign Gold Bonds (SGBs) is the government second salvo as part of its plan to curb the import of gold. In its budget proposal in February, the government had proposed the introduction of the Gold Monetisation Scheme (GMS), which was introduced a month ago and now the SGB is the second measure.
Sovereign Gold Bonds
|»||Proposed Sovereign Gold Bonds (SGBs) is part of government’s budget proposal along with Gold Monetisation Scheme (GMS)|
|»||While GMS proposes to ‘monetize’ India’s massive stock of physical gold, SGBs intend to convert the investment demand for physical gold into paper demand|
|»||If subscribed fully in the first year, SGBs could result in saving of $2 billion on gold imports at current prices|
SGBs are to be linked to the price of gold, and issued by the central bank (Reserve Bank of India). It is proposed that banks, non-banking finance companies (NBFCs) and post offices will be able to collect money and redeem the bonds on behalf of the government. The bonds are to be issued in denominations of two, five and 10 grams of gold with a minimum tenor of five to seven years.
“Any step that increases consumer choices and makes gold a fungible asset class is good. Our research confirms the growing interest among Indian consumers for interest-bearing gold-based investment products,’’ Somasundaram P.R. MD, India, World Gold Council, said.
“Unlike the GMS, where the primary objective is to ‘monetize’ India’s massive stock of physical gold, the SGBs scheme intends to convert the investment demand for physical gold into paper demand,’’ according to Sonal Varma, India economist at Nomura.
In 2014, India’s investment demand for gold was at 181 tonnes against an average annual demand of 345 tonnes from 2010 to 2013. “If the scheme is subscribed fully in the first year, then it would represent 27 per cent of the 2014 investment demand and would result in saving of $2 billion on gold imports at current prices,’’ the report said.
Importantly, a 2 per cent lower limit of interest rate has been indicated and will be paid in terms of gold grams. On maturity, the investor is to get an amount equivalent to the face value of gold in rupee terms.
As with the Gold Monetisation Scheme, the interest rate could determine its success. “It is an excellent scheme and is a new alternative investment avenue while having ‘gold’ tagged to it and will surely gain popularity among investors,’’ Prithviraj Kothari, Managing Director, Riddhi Siddhi Bullions and Vice-President of India Bullion and Jewellers’ Association, told this correspondent.