SGB Scheme Has Higher Chances of Success

Mumbai: Gold crazy Indian consumers have provided a great deal of troubles to the government so far by their habit of accumulating the yellow metal which according to an estimate may have reached to a figure of 20,000 to 24,000 tons in their as well as temple-trusts’ safes.

It is now a known fact that India is the number one gold importing country where people consume about 1000 tons of the yellow metal every year. This costs heavily in form of foreign exchange bills to the government which has so far taken numerous measures including heavy increase in import duty (up to 10% in August 2013) on gold to control the widening Current Account Deficit (CAD) but with no avail!

Now the government in its recent budget had proposed to introduce Gold Monetization Scheme (GMS, which we have already discussed here in one of my posts) and Sovereign Gold Bonds (SGBs) scheme as its novel initiatives to dig out the ‘idly lying huge amount of gold’ with people and temple trusts and to discourage people from buying the physical gold. The Indian Cabinet of Ministry recently gave its approval to both the schemes for its implementation.

The SGB is a new salvo of the government to control its gold-import bills which is initially welcomed by consumers as well as the industry circles. The consumers as well as investors will now have a better option for investing in gold than buying physical gold or investing in gold ETFs or funds of mutual funds. The bonds will be issued in rupee terms by the Reserve Bank of India (RBI) through banks, Non-Banking Finance Companies (NBFCs), post offices etc. in denominations of 5, 10, 50 and 100 grams of gold or other denominations. An upward cap of 500 grams per person per year has been recommended.

While other gold investing instruments only offer returns tracking gold prices, SGBs offer interest rates over and above the capital gains on account of price rise. It could rise up to 3% annually. Minimum tenor of the bonds is likely to be 5 to 7 years but they can be sold anytime as they would be traded on exchanges and thus will allow easy exits.

Bond-buyers can hold the bond and get interest and capital gains over the term of the investment. They can even go to a bank (in case they need money) and offer the bond as collateral to take loan against it at a loan-to-value ratio permitted by RBI. Besides, the Indian government has proposed tax benefits on capital gains in its next budget 2016-17.

According to Nomura, a Japanese brokerage firm, the SGB scheme has a higher chance of succeeding and would potentially cut India’s gold import bill. It is sovereign- backed and provides an attractive investment option to the households that would like to hold gold as part of their investment portfolio and earn a coupon along the way.”

Significantly, a 2% lower limit of interest rate has been indicated and will be paid in terms of gold grams. The investor will get an amount equivalent to the face value of gold in rupee terms on maturity.

Mr. Somasundaram P.R. MD, India, World Gold Council says, “Any measure which increases consumer choices and makes gold a fungible asset class is good. Our research confirms the growing interest among Indian consumers for interest-bearing gold-based investment products.’’

Posted by Suresh Chotai