India to Issue Sovereign Gold Bonds

RBI-logoNew Delhi: Government of India proposes to issue gold bonds with a sovereign guarantee to divert investment demand for physical gold to a financial instrument, reports Business Standard. This will give more returns than gold as interest will also be factored in. In a draft outline of the scheme, the government said it expects around Rs.13,500 crore to be invested in the bonds which is equivalent to 50 tonnes of gold. As per the scheme, investment and redemption will be by paying money but linked to gold price.

Interestingly government has said that it is considering to provide capital gains tax the same treatment as for physical gold. While gold price rise and fall benefit will be passed on to investors, issuing agency, RBI in this case, will not have to bear the price risk, nor hedge it and, “the government would bear the risk of gold price movement on issuances”.

As per draft outlines issued yesterday, government is proposing to shift part of the estimated 300 tons of physical bars and coins purchased every year for investment into ‘demat’ gold bonds. The finance minister had mentioned about the scheme in his budget speech about the sovereign scheme for gold along with gold monetization scheme. Draft monetization scheme was issues last month.

Both the schemes were in response to suggestion to reduce import of gold in view of its rising share in import bill.

Sovereign bonds will be issued on behalf of the Government of India by RBI and can be purchased by paying money and only resident Indians can purchase it and cap will be fixed which will not be more than 500 grams per person per year, said the draft.

For investing in gold, at present one buys physical gold which is imported. Even gold Exchange Traded Funds have to cover sale of units by buying equivalent amount of physical gold. Proposed bonds which will have sovereign guarantee will be only cash transaction and not need to cover up it with physical gold.

Draft says, “The Government will issue bonds with a nominal rate of interest (which will be linked to international rate for gold borrowing). An indicative lower limit of 2% may be given but the actual rate will have to be market determined. On maturity, the investor receives the equivalent of the face value of gold in Rupee terms. The rate of interest on the bonds will be payable in terms of grams of gold. The interest will be calculated on 10,000 at a certain percentage, say 2 or 3%”.

These bonds will be marketed through post offices and by various brokers/agents. Since the bond will be a part of the sovereign borrowing, these would need to be within the fiscal deficit target for 2015-16 and onwards.