The Sovereign Gold Bonds scheme was launched in the budget session 2016 and approved by the cabinet to reduce the demand for physical gold.
Background
- India is one of the largest importers of Gold in the world
- The demand for Gold in India is rising rapidly
- Imports from India see a hike, with Gold as the primary contributor
- This affects the balance of trade figures for India
- GOI needed to restrict Gold imports to have a positive balance of trade
- This created the need for a Gold bonds scheme
- Gold Bonds are seen as an alternative to purchasing gold metal
About Sovereign Gold Bonds
- Gold Bonds are issued by RBI with a fixed interest rate
- Ministry of Finance is the concerned ministry
- RBI, in consultation with Finance Ministry, determines the issuing amount
- Risk of gold price changes borne by the Gold Reserve Fund created by RBI
- GOI aims to shift 300 tonnes of Gold purchased annually as bars and coins into the Gold Bond Scheme
- This Gold Bond scheme is expected to help GOI sustain the current account deficit
How do Sovereign Gold Bonds Work?
- Gold Bonds are sold in banks.
- Investors can buy gold bonds from banks, preferably where they have Saving Bank accounts.
- Gold Bonds are treated similarly to a Bank Fixed Deposit
- The interest rates are fixed at 1 to 2 percent
- The tenure of the bond is from 5 to 7 years
- The value of the bond is determined by the gold price movements in the market.
- Gold Bonds have an attractive feature.
- The investor will get the value of the bond according to the prevailing gold prices in the market at the time of redemption.
- In this manner, the investor will get the same benefit of purchasing the metal gold without actually buying it.
- In this manner, GOI can restrict Gold imports to a certain extent
- Returns on gold bonds can be positive or negative
- All risks of the gold bond are covered under the Gold Reserve Fund
Features of Sovereign Gold Bond
- Bonds issued by RBI with a sovereign guarantee
- Bonds can be easily traded and sold on exchanges
- Gold Reserve Fund will be created by GOI through RBI
- On gold bond maturity, redemption will be made in Rupee only
- The price of gold bonds will vary with the market prices of gold
- Investor needs to be aware of this price volatility
- Gold bond deposits will not be hedged
- RBI has a fixed tenor of the bond from 5 to 7 years to protect the investors from medium-term volatility
Limitations
- An NRI cannot buy gold bonds issued by RBI
- Common Indians buy gold for marriage and other occasions as Jewellery and not for investment purposes.
- The attitude of a typical Indian towards gold is not of an investor nature
- This attitude will see a Luke warm response to the Gold bonds scheme
- Also, the interest rate offered is meager, to the tune of 2.5%
Conclusion
- The scheme’s effectiveness will depend on the investor’s attitude toward the gold bond scheme.
- GOI must take steps to change the mindset of Indians from viewing gold as jewelry or a status symbol to an investment avenue
- This transition in the behavior of Indians will take time
- Overall, the Gold bond scheme is a welcome measure to cut imports of gold purchase.