Sovereign Gold Bonds Scheme: All You Need To Know

Published on Friday, December 23, 2016

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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