Sovereign Gold Bonds Scheme: All You Need To Know

Introduction

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 of India see a hike with Gold as the major contributor
• This affects the balance of trade figures for India
• GOI needed to restrict the Gold imports to have a positive balance of trade 
• This created the need for Gold bonds scheme
• Gold Bonds are seen as an alternative to purchase gold metal

About 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 does Gold Bonds Work?

• Gold Bonds are sold in banks
• Investor can walk in buy the gold bonds from the banks preferably where they have their Saving Bank accounts
• Gold Bonds are treated in a similar manner as 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
• 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 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 purchasing 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 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
• Price of gold bond 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 fixed tenor of the bond from 5 to 7 years to protect the investors from medium term volatility

Limitations

• NRI cannot buy gold bonds issued by RBI
• Common Indian buys gold for marriage and other occasions as a Jewellery and not for investment purpose
• The attitude of a common Indian towards gold is not of investor nature
• This attitude will see a Luke warm response to the Gold bonds scheme
• Also, the interest rate offered is very low in the tune of 1% to 2%

Conclusion

• The effectiveness of the scheme will depend on the investor attitude towards the gold bond scheme
• GOI must take steps to change the mindset of Indians from viewing gold as a jewellery or a status symbol to an investment avenue
• This transition in behaviour of Indians will take time 
• Overall, Gold bond scheme is a welcome measure to cut imports on gold purchase