New Delhi: The cabinet of the government of India today announced the launch of Gold Sovereign Bonds (GSB) and a separate Gold Monetization Scheme (GMS) in a bid to lure away Indians from buying physical gold. Both the gold schemes announced today were part of the annual Budget proposal.

The salient features of both the gold schemes are:

• The sovereign gold bond will enable investors to buy gold certificates from the government, which can later be encashed for money or physical gold.
• Gold bonds will be issued with a rate of interest to be decided by the government. Interest will be calculated on the value of gold deposited at the time of investment.
• Gold bonds will be issued in denominations of 5, 10, 50, 100 grams of gold. The cap per person per year has been set at 500 grams, the government said.
• Duration of such gold bonds will be for minimum of 5 to 7 years to protect investors from medium term volatility in gold prices, the government said.
• Gold bonds are expected to reduce the demand for physical gold bars and coins by shifting a part of estimated 300 tons per annum for investment into gold bonds.
• The gold monetization scheme involves mobilization of tonnes of the yellow metal stored in households and temples.
• The gold monetization scheme that will enable depositors to earn interest on their on their gold accounts. Under this scheme, the minimum quantity of gold that has to be deposited is at 30 grams.
• The gold monetization scheme will cut down on imports, thus reducing foreign exchange outflows. According to estimates, India paid $34.32 billion to import around 930 tonnes of gold in the year ending March 2015.
• Gold monetization scheme, in long term, will reduce country’s reliance on the import of gold and put it to productive use, the government said.
• Though stocks of gold in India are estimated to be over 20,000 tonnes, most of this gold is neither traded, nor monetized. Gold collected through the scheme will be made available to jewelers for manufacturing of new jewellery and other items.

Mr. Somasundaram PR, Managing Director, India, World Gold Council (WGC) said, “The Union Cabinet’s announcements reflect both a very practical approach and a long term view of gold. The question is no longer whether the scheme will work, but how to make it attractive for customers. The scheme must be well marketed promoting the attractive features that individual banks may include in the design of their offer within the monetization framework to ensure that the households savings in gold can be tapped by the banking industry. This will pave the way for a more active and larger role for Indian banks in bullion.”

“We have been emphasizing the need for the introduction of a structured and consumer friendly gold monetization scheme which would enhance gold’s economic value. The approval by the Union Cabinet is a step towards gold becoming an integral part of the larger financial system and a fungible asset class in its own right. The Gold Monetization Scheme will drive orderly recycling and enhance transparency, benefiting millions of households and the macro economy, as it has the potential to translate gold savings into economic investments. In addition, the Sovereign gold bond scheme will allow savers to sell or trade bonds easily on commodity exchanges and key features, such as the ability to use them as collateral for loans and capital gains tax treatment similar to gold, are very thoughtful and timely.”

“Any step that increases consumer choice and improves the fungibility of gold is good. It is important to give the scheme time to stabilize under the new framework. Banks and their customers should become familiar and comfortable with the new processes and these must be allowed to evolve based on initial feedback – in the long term, the scheme will help monetize gold stocks held privately and put them to work for the Indian economy.”