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
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